Question

(a) Why must price cover AVC if firms are to continue to operate? (b) If firms are covering AVC but not all of their fixed costs, will they continue to operate in the short-run period? Why or why not? (c) Why is it possible for price to remain above average cost in the short-run period? (d) Why would one expect price to equal marginal cost in the short-run period?

   (a) Why must price cover AVC if firms are to continue to operate?
(b) If firms are covering AVC but not all of their fixed costs, will they continue to operate in the short-run period? Why or why not?
(c) Why is it possible for price to remain above average cost in the short-run period?
(d) Why would one expect price to equal marginal cost in the short-run period?

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Intermediate Microeconomics

Intermediate Microeconomics

Robert W. Clower,… 1st Edition

Chapter 9, Problem 9

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Step 1

Variable costs change with the level of output, such as raw materials, labor, etc. - If the price that a firm receives for its product is at least equal to the AVC, the firm can cover these variable costs. This is crucial because if a firm cannot cover its Show more…

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(a) Why must price cover AVC if firms are to continue to operate? (b) If firms are covering AVC but not all of their fixed costs, will they continue to operate in the short-run period? Why or why not? (c) Why is it possible for price to remain above average cost in the short-run period? (d) Why would one expect price to equal marginal cost in the short-run period?

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