Question: Suppose you are working as a consultant for a perfectly competitive fi

Question

Question: Suppose you are working as a consultant for a perfectly competitive firm that is worried about its policies in the short run. What would you recommend in terms of quantity changes (raise, cut, shut down or stay put) and price changes (raise, cut, stay put) in each of the following two situations:

a) P = $20; MC = $5; TVC = 1250; AFC = $10; TFC = $500.
b) AVC is at its minimum; AFC = $5; ATC = $9; TC = $90; TR = $50

[P = price; Q = quantity; AVC = average variable cost; ATC = average total cost; TC = total cost; MC = marginal cost]

Explanation / Answer

(a) It should raise quantity and decrease price, because its price is much higher than its marginal cost. (b) It should stay put because it has minimized its AVC.

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