In the graph, if the market price falls to ₹5, what does the firm do in the short run? A firm's short-run cost curves. AVC is lowest at ₹6 (point S, 3 units); AC is lowest at ₹15 (point B, 4 units); the rising MC curve passes through S and B. A price line is drawn at ₹24.

In the graph, if the market price falls to…

In the graph, if the market price falls to ₹5, what does the firm do in the short run?

Question 24

HardOriginal question

In the graph, if the market price falls to ₹5, what does the firm do in the short run?

A firm's short-run cost curves. AVC is lowest at ₹6 (point S, 3 units); AC is lowest at ₹15 (point B, 4 units); the rising MC curve passes through S and B. A price line is drawn at ₹24.

Produces at a lossCorrect answerYour answerShuts down, because ₹5 is below minimum AVC of ₹6Correct answerYour answerEarns normal profitCorrect answerYour answerProduces where MC = ₹15Correct answerYour answer

Show the answer and explanation

CorrectNot quiteAnswer B

Correct answer: B

Below minimum AVC, producing cannot even cover variable cost.
Shutting down limits the loss to the fixed cost, so the firm supplies nothing.

Concept: Price below shut-down point
Typical timeTypical: 100 s
Your timeYours: —

The rule this testsProfit maximisation and the firm's supply

Practise this chapter →

Ten questions from Perfect Competition & Supply, at your own pace.

Practise this chapter →

Ten questions from Perfect Competition & Supply, at your own pace.

In the graph, if the market price falls to ₹5, what does the firm do in the short run?

Question 24

Explanation