Unit Two: Assignment 2: Problem 7 from page 586

In the long-run you would have to exit the business because all costs must be covered. Average Total Cost = Average Fixed Cost plus Average Variable Cost (ATC = AFC + AVC). In the short run, it depends on whether the price ($12) is enough to cover the firm's average variable cost. If the lowest AVC in the production function is $10, then yes, the firm would stay open for the short-run. It would do worse by closing since it would still have to pay fixed costs. If the lowest AVC is $15, then the firm would close, even in the short-run. In order to stay open in the short-run, variable costs must be covered.