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:

Voidable Contract

A voidable contract is a legal agreement that may be annulled or declared invalid by one of the parties due to certain defects, while remaining valid until such action is taken.

Result

The outcome or consequence of an action, process, or situation, often measured to determine success or failure.

Contract

An accord among several parties that is legally obligatory and subject to legal enforcement.

Duress

A condition whereby a person performs an act as a result of violence, threat, or other pressure against the person.