Mrs Smith Is Operating a Firm in a Competitive Market

Multiple Choice

Mrs. Smith is operating a firm in a competitive market. The market price is $6.50. At her profit-maximizing level of output, her average total cost of production is $7.00, and her average variable cost of production is $6.00. Which of the following statements about Mrs. Smith's firm is correct?

A) Mrs. Smith is earning a loss and should shut down in the short run.
B) Mrs. Smith is earning a loss but should continue to operate in the short run.
C) Mrs. Smith is earning a profit since the price is above the average variable cost.
D) Without knowing Mrs. Smith's marginal cost, we cannot determine whether she should stay in business or shut down.