Consider the Following Data: Equilibrium Price = $12

question 91

Multiple Choice

Consider the following data: equilibrium price = $12.50, quantity of output produced = 1,000 units, average total cost = $15, and average variable cost = $13. What will the firm do and why?

• A)Shut down in the short run, because price is below average variable cost.
• B)Shut down in the short run, because it will be taking a loss of $2,500 if it continues to produce which is less than the loss it will earn if it shuts down.
• C)Continue to produce in the short run, because price is greater than average variable cost.
• D)Continue to produce in the short run, because firms are always stuck with having to produce in the short run.

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Definitions:

Asian Options

A type of option where the payoff depends on the average price of the underlying asset over a certain period of time rather than at maturity.

American Options

Options that can be exercised at any time before expiration, as opposed to European options which can only be exercised on the expiration date.

European Options

Financial derivatives that give the holder the right to buy or sell an underlying asset at a specified price, but only on the option's expiration date.

Payoff

The return received from an investment or the outcome of a decision or transaction.