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    Short run production decisions - price decline

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    A firm produces 10 units per week at a price of $500 each. With AFC of $100 and AVC $350 per unit, the firm is earning economic profits of $500 per week. If the price of the product declines to $400, should the firm continue to produce this product? Explain your answer.

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    Solution Preview

    The answer will depend upon whether we are taking a decision in short run or in long run. Short run is a period in which some costs are pre-committed (fixed) and cannot be changed even if we stop production. Whereas in long run all costs can be ...

    Solution Summary

    This post shows how the firm can decided whether to continue the operations in short run or not.