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:

Market Price

The ongoing rate at which a service or asset is traded in a particular market.

Monopoly

A market structure characterized by a single seller or producer dominating the entire market, with no close substitutes for its product or service.

Industry Depicted

A graphical or descriptive representation of a sector's characteristics, trends, and dynamics.

Graph

A diagram representing data, showing the relationship between two or more variables; typically consists of lines, bars, or symbols.