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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 Summary

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

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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 ...

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