Anka runs a water sports service in a perfectly competitive beach town. The price she is able to charge for her services varies from day to day, but she has no control over that price. Her cost and revenue curves for a perfectly competitive industry are shown in this graph:

What is the lowest price at which Anka would be willing to produce in the short run?

Choose 1 answer:
(A) $\$ 140$
(B) $\$ 55$
(C) $\$ 90$
(D) $\$ 40$
(E) $\$ 147$

Question

Anka runs a water sports service in a perfectly competitive beach town. The price she is able to charge for her services varies from day to day, but she has no control over that price. Her cost and revenue curves for a perfectly competitive industry are shown in this graph:

What is the lowest price at which Anka would be willing to produce in the short run?

Choose 1 answer:
(A) $\$ 140$
(B) $\$ 55$
(C) $\$ 90$
(D) $\$ 40$
(E) $\$ 147$

Accepted Answer

∻Solution∻ ‖ a ⋮ Short-Run Production Decision: In the short run, a firm will continue to produce as long as the price (P) covers the average variable cost (AVC). If P < AVC, the firm should shut down because it cannot cover its variable costs. ‖ ‖ b ⋮ Graph Analysis: The graph shows that the lowest point on the AVC curve corresponds to a cost of $55. This is the minimum price at which Anka would cover her average variable costs. ‖ ‖ c ⋮ Lowest Price for Short-Run Production: Since Anka would want to cover at least her AVC to avoid losses greater than her fixed costs, the lowest price at which she would be willing to produce in the short run is where P = AVC. ‖ ∻Answer∻ ⚹ (B) $55 ⚹ ∻Key Concept∻ ⚹ Short-Run Shutdown Decision ⚹ ∻Explanation∻ ⚹ In the short run, a firm will produce as long as the price is greater than or equal to the average variable cost. Below this price, the firm is better off shutting down temporarily. ⚹◊Can you calculate Anka's profit-maximizing quantity of production in the short run using the provided cost and revenue curves?⍭ Generate me a similar question◊

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