Mrs Smith Is Operating a Firm in a Competitive Market

question 89

Multiple Choice

Mrs. Smith is operating a firm in a competitive market. The market price is $6.50. At her profit-maximizing level of output, her average total cost of production is $7.00, and her average variable cost of production is $6.00. Which of the following statements about Mrs. Smith's firm is correct?

• A)Mrs. Smith is earning a loss and should shut down in the short run.
• B)Mrs. Smith is earning a loss but should continue to operate in the short run.
• C)Mrs. Smith is earning a profit since the price is above the average variable cost.
• D)Without knowing Mrs. Smith's marginal cost, we cannot determine whether she should stay in business or shut down.

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Definitions:

Paasche Price Index

An economic measure that calculates the change in the cost of acquiring a given basket of goods and services in the current year compared to a base year, using the current year's prices.

Laspeyres Index

A price index used to measure the relative change in the price of a fixed basket of goods and services over time, using the quantities of a base period.

Prices

The monetary value assigned to a product or service, determining how much it costs to buy.

Bundle

A combination of various goods and services selected by consumers, used in economics to analyze choices and preferences.