Q. 105.0( 2 Votes )

Will a profit-maximising firm in a competitive market produce a positive level of output in the short run if the market price is less than the minimum of AVC? Give an explanation.

Answer :

No a profit maximizing firm will not produce at a level of output in short run when market price is less than minimum average cost because equality between market price and minimum average cost indicate the shutdown point. So a firm will never operate at a price less than minimum average cost.


In the given graph –


At Price S, and Quantity M


TR = OS X OM, which is represented by the OMRS


TC = SAVC X OM = OP X OM, which is represented by the OMQP


Profit = TR – TC = OMRS - OMQP


As we can see


TC > TR, so there is loss, which is represented by PQRS


Thus the firm shall stop production whenever Price/AR < SAVC


In short run, at profit maximising level, AC ≥ SAVC


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