Economics Principles For A Changing World
Economics Principles For A Changing World
4th Edition
ISBN: 9781464186660
Author: CHIANG, Eric P.
Publisher: Worth Publishers,
Question
Book Icon
Chapter 8, Problem 1QP
To determine

Explain why the price needs to cover the average variable cost (AVC) of a firm.

Expert Solution & Answer
Check Mark

Explanation of Solution

The average total cost (ATC) of a firm is the sum total of average variable cost (AVC) and the average fixed cost (AFC). The price and the AVC of a firm should be equal. This means that a firm should continue to produce as long as the price is higher than the average AVC. Once price drops below that point, it makes sense to shut down temporarily. Otherwise, losses of the firm will exceed the fixed cost. Finally, the firm will stop the production and close the firm.

Hence, if a firm wants to continue its operations in the market, then the price have to cover the AVC of the firm.

Economics Concept Introduction

Average variable cost: The average variable cost is the total variable cost divided by the quantity produced in a given time period.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Knowledge Booster
Background pattern image
Recommended textbooks for you
Text book image
ENGR.ECONOMIC ANALYSIS
Economics
ISBN:9780190931919
Author:NEWNAN
Publisher:Oxford University Press
Text book image
Principles of Economics (12th Edition)
Economics
ISBN:9780134078779
Author:Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:PEARSON
Text book image
Engineering Economy (17th Edition)
Economics
ISBN:9780134870069
Author:William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:PEARSON
Text book image
Principles of Economics (MindTap Course List)
Economics
ISBN:9781305585126
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Text book image
Managerial Economics: A Problem Solving Approach
Economics
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Cengage Learning
Text book image
Managerial Economics & Business Strategy (Mcgraw-...
Economics
ISBN:9781259290619
Author:Michael Baye, Jeff Prince
Publisher:McGraw-Hill Education