Question

T-Shirt Enterprises is operating in a perfectly competitive market. It is producing 3.000 t-shirts and selling them for $10 each. At this level of output, the average total cost is $10.50 and the average variable cost is $10.20. Based on these data, the firm should:_______.
a) shut down in the short run.
b) decrease production to 2, 500 t-shirts.
c) continue to produce 3, 000 t-shirts.
d) increase production to 3, 500 t-shirts.

Answer 1

Answer:

Option (a) is correct.

Explanation:

Given that,

At the production level of 3,000 shirts,

Selling price of each shirt = $10

Average total cost = $10.50

Average variable cost = $10.20

From the above information, we can conclude that the firm should shut down its operations in the short run as it won't be able to cover the variable cost. The selling price of each shirt is less than the average variable cost of producing shirt.

If the firm is able to cover only its variable costs then this firm continue operating in this perfectly competitive market.