Refer to Figure 14-13. If the price is \$6 in the short run, which of the following statements is correct regarding the firm's production decision?

• A. The firm should continue producing because price is greater than average variable cost.
• B. The firm should shut down because price is less than average variable cost.
• C. The firm should shut down because price is less than average total cost.
• D. The firm should increase output to maximize profit.

Answer: (A)

Verified step by step guidance

1. Step 1: Identify the key variables from the problem: the market price (\$6), the firm's average variable cost (AVC), and the firm's average total cost (ATC) at the given output level. These values are typically found on the graph (Figure 14-13).
2. Step 2: Understand the shutdown rule in microeconomics: a firm should continue producing in the short run if the price (P) is greater than or equal to the average variable cost (AVC), because it can cover its variable costs and contribute to fixed costs. If P < AVC, the firm should shut down immediately to minimize losses.
3. Step 3: Compare the price (\$6) to the average variable cost (AVC) at the current output. If \$6 > AVC, the firm covers its variable costs and should continue producing; if \$6 < AVC, the firm should shut down.
4. Step 4: Consider the average total cost (ATC) as well. If price is less than ATC but greater than AVC, the firm incurs losses but should still produce in the short run to minimize losses compared to shutting down.
5. Step 5: Based on these comparisons, determine the correct production decision: whether to continue producing or shut down. Increasing output to maximize profit depends on marginal cost and marginal revenue, which requires additional information not provided here.