Answer to Question #83174 in Microeconomics for Israel

Question

Suppose a perfectly competitive firms demand cube is below its average total costs curve.explain the conditions under which a firm continues to produce in the short run.

2.) suppose the industry equilibrium price of residential housing is $100 per square foot and a minimum average variable cost for a residential construction contract is $110 per square foot. What would you advice the owner of the firm to do, explain your answer

Answer 1

If a perfectly competitive firms demand curve is below its average total costs curve, then a firm continues to produce in the short run, if AVC < P < ATC, or demand curve is above the average variable cost curve at the profit-maximizing output.

2) If the industry equilibrium price of residential housing is $100 per square foot and a minimum average variable cost for a residential construction contract is $110 per square foot, then the firm should shut down, because its P < AVC.