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If price exceeds AVC but in smaller than AC at the best level of output, the firm is:

A. Making a profit

B. Incurring a loss but should continue to produce in the short-run

C. Incurring a loss and should stop producing immediately

D. Making a normal profit

Correct Answer : B.


If price exceeds AVC (greater than AVC i.e. firm covers its AVC) but in smaller than AC (i.e. firm does not covers its AC) at the best level of output, the firm is incurring loss but should continue to produce in the short-run b/c the firm is atleast covering its AVC.}

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