True or False. Suppose the minimum average total cost (ATC) of a firm competing in a competitive price-taker market was $1.00 per unit and that the firm's minimum average variable cost (AVC) was $.80 per unit. If the market price was $.75 per unit, a profit-seeking firm would shut down.

Question

Business

Kimberly Leblanc

31 July, 14:51

True or False. Suppose the minimum average total cost (ATC) of a firm competing in a competitive price-taker market was $1.00 per unit and that the firm's minimum average variable cost (AVC) was $.80 per unit. If the market price was $.75 per unit, a profit-seeking firm would shut down.

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Conner Proctor · Answer 1

True

Explanation:

At least in the short run the company will stop production since the contribution margin will be negative: variable costs are higher than selling price, so the company is losing money with every unit it produces.

The company should start producing again as soon as the price increases and the contribution margin is positive. This way the company will at least be able to cover some of its fixed costs.