The owner of Tie-Dyed T-shirts, a perfectly competitive firm, has hired you to g

Question

The owner of Tie-Dyed T-shirts, a perfectly competitive firm, has hired you to give him some economic advice.  He has told you that the market price for his shirts is $20 and that he is currently producing 200 shirts at an AVC of $15 and an AC of $25.  What would you recommend to him?

To continue producing in the short run, as his loss from production in the short run is less than his fixed costs (or price is greater than AVC), but to exit the industry in the long-run if there are no changes in economic conditions.

To shut down in the short run, as he is incurring a loss and to leave the industry in the long run, of there are no changes in economic conditions.

To continue to produce in the short run, even though he is earning a loss, and to expand in the future with the hope of increasing market share and total revenue.

You tell him you cannot make any recommendations until you know what his fixed costs are.

To continue producing in the short run, as his loss from production in the short run is less than his fixed costs (or price is greater than AVC), but to exit the industry in the long-run if there are no changes in economic conditions.

To shut down in the short run, as he is incurring a loss and to leave the industry in the long run, of there are no changes in economic conditions.

To continue to produce in the short run, even though he is earning a loss, and to expand in the future with the hope of increasing market share and total revenue.

You tell him you cannot make any recommendations until you know what his fixed costs are.

Explanation / Answer

To continue producing in the short run, as his loss from production in the short run is less than his fixed costs (or price is greater than AVC), but to exit the industry in the long-run if there are no changes in economic conditions.

Reason

Since fixed cost is sunk cost, one can not recover it even if it decides to shut down, so it is for the firm's best interest not to shut down in the short run.

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