Microeconomics Quiz: Firms Short And Long Run Decisions
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Firms Short And Long Run DecisionsQuestion 1 of 20

A perfectly competitive firm currently produces where marginal cost equals $30, which is also the market price. The firm's average variable cost is $25 and average total cost is $35. If the firm expects market price to fall to $22 next period due to new firm entry, and its cost structure will remain unchanged, what should the firm plan for next period?

Continue producing at the same output level since the price reduction is temporary and will reverse when entry stops
Exit the market permanently since the price reduction indicates long-run industry decline and overcapacity
Shut down production since the new price will not cover average total cost, making continued operation unprofitable
Reduce output to the level where marginal cost equals $22, and evaluate whether this price covers the average variable cost at the new output level
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Microeconomics Quiz

Microeconomics Quiz: Firms Short And Long Run Decisions

Practice Firms Short And Long Run Decisions in Microeconomics with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

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This quiz focuses on Firms Short And Long Run Decisions, giving you a quick way to practice the rules, question types, and explanations that matter most for Microeconomics.

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Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

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Question 1

A perfectly competitive firm currently produces where marginal cost equals $30, which is also the market price. The firm's average variable cost is $25 and average total cost is $35. If the firm expects market price to fall to $22 next period due to new firm entry, and its cost structure will remain unchanged, what should the firm plan for next period?

  1. Continue producing at the same output level since the price reduction is temporary and will reverse when entry stops
  2. Exit the market permanently since the price reduction indicates long-run industry decline and overcapacity
  3. Shut down production since the new price will not cover average total cost, making continued operation unprofitable
  4. Reduce output to the level where marginal cost equals $22, and evaluate whether this price covers the average variable cost at the new output level (correct answer)
Explanation: This question tests your understanding of short-run production decisions in perfect competition, specifically how firms respond to price changes by comparing price to marginal cost and average variable cost. When market price falls to $22, the firm should follow the profit-maximizing rule of producing where price equals marginal cost, meaning it should adjust output until $MC = \22 . The critical question then becomes whether this new price covers average variable cost at that output level. Since the firm's current average variable cost is $25 at the higher output level, and costs typically vary with production levels, the firm needs to evaluate whether P≥AVCP \geq AVC at the new, lower output level to determine if it should continue operating. Choice A is incorrect because it assumes price changes are temporary and ignores the fundamental rule that firms should always produce where P=MCP = MC regardless of whether price changes are permanent or temporary. Choice B is wrong because a firm should only exit permanently when it cannot cover average variable costs in the short run or average total costs in the long run consistently—one period of losses doesn't automatically justify permanent exit. Choice C misapplies the shutdown rule by focusing on average total cost instead of average variable cost. Firms shut down only when price falls below average variable cost, not average total cost. Remember: In the short run, compare price to AVC for shutdown decisions, but always produce where P=MCP = MC if continuing to operate. The key is evaluating profitability at the optimal output level, not the current one.

Question 2

A perfectly competitive firm currently produces 500 units at a price of $8 per unit. Its average variable cost is $6, average total cost is $10, and marginal cost is $8. If the firm expects these cost conditions to persist indefinitely and believes the market price will remain at $8, what should the firm do in the short run and long run?

  1. Continue producing 500 units in both the short run and long run since price equals marginal cost
  2. Continue producing in the short run to cover variable costs but exit the market in the long run due to economic losses (correct answer)
  3. Shut down immediately in the short run since average total cost exceeds price and remain out of the market long term
  4. Increase production in the short run to reduce average total cost and continue operating in the long run at higher output
Explanation: In the short run, the firm should continue producing because price (8)exceedsaveragevariablecost(8) exceeds average variable cost (6), covering variable costs and contributing 2perunittowardfixedcosts.However,sinceprice(2 per unit toward fixed costs. However, since price (8) is less than average total cost ($10), the firm incurs economic losses of $2 per unit. In the long run, when all costs are variable, the firm cannot sustain losses and should exit the market. Choice A ignores the loss condition. Choice C is wrong because the firm covers variable costs in the short run. Choice D incorrectly assumes the firm can reduce ATC by increasing output when it's already producing at the profit-maximizing level where P = MC.

Question 3

In a perfectly competitive market, firms currently earn zero economic profit at a market price of $12. Due to an increase in consumer income, market demand increases, raising the short-run equilibrium price to $16. Assuming identical cost structures across firms, what sequence of events will most likely occur?

  1. Existing firms increase output and earn economic profits, attracting new firms until price returns to approximately $12 (correct answer)
  2. Existing firms maintain current output levels while new firms enter, causing price to gradually decline to $14
  3. Market supply immediately adjusts through new firm entry, preventing any temporary profits for existing firms
  4. Existing firms reduce output to maintain scarcity and preserve the higher price of $16 in the long run
Explanation: When demand increases and price rises to $16, existing firms will increase output (moving along their MC curves) and earn positive economic profits since price now exceeds their minimum ATC. These profits signal new firms to enter the market, increasing market supply and gradually reducing price back toward the original long-run equilibrium price of $12 where firms earn zero economic profit. Choice B incorrectly suggests firms don't adjust output and that price stabilizes above the zero-profit level. Choice C is wrong because entry takes time, so temporary profits do occur. Choice D contradicts competitive behavior where firms are price-takers and cannot coordinate to maintain high prices.

Question 4

A perfectly competitive firm faces the following situation: market price = $15, marginal cost = $12, average variable cost = $10, and average total cost = $18. If marginal cost is rising and the firm is currently producing 200 units, what should the firm do to maximize profit (or minimize loss)?

  1. Shut down immediately since average total cost exceeds price, resulting in smaller losses than continuing production
  2. Continue producing 200 units since the current output level covers all variable costs and contributes to fixed costs
  3. Increase production beyond 200 units until marginal cost equals the market price of $15 (correct answer)
  4. Decrease production to reduce average total cost and achieve profitability at the current market price
Explanation: The profit-maximizing rule for a competitive firm is to produce where P = MC. Since price (15)exceedsmarginalcost(15) exceeds marginal cost (12) and MC is rising, the firm should increase output until MC = $15. The firm should continue operating because price exceeds AVC, covering variable costs plus contributing to fixed costs. Choice A is wrong because the firm covers variable costs (shutdown rule: shut down only if P < AVC). Choice B incorrectly accepts the current suboptimal output level. Choice D misunderstands that firms maximize profit by equating P and MC, not by trying to manipulate average costs.

Question 5

In a constant-cost perfectly competitive industry initially in long-run equilibrium, a permanent increase in production costs (such as higher wages) affects all firms equally. Which of the following best describes the adjustment process and final outcome?

  1. Short-run losses lead to firm exit, reducing supply until the original price is restored and remaining firms earn zero economic profit
  2. Firms immediately raise prices to cover higher costs, maintaining zero economic profit throughout the adjustment period
  3. Short-run losses cause firm exit, reducing supply and raising price until a new long-run equilibrium with higher prices and zero economic profit (correct answer)
  4. Higher costs are absorbed through efficiency improvements, keeping the long-run equilibrium price and quantity unchanged
Explanation: When production costs increase for all firms, their cost curves shift upward. At the original price, firms now incur losses (since ATC increased but price remained the same). This causes some firms to exit, reducing market supply and raising the equilibrium price. The new long-run equilibrium occurs at a higher price where surviving firms again earn zero economic profit, but with higher cost structures. Choice A incorrectly suggests price returns to the original level. Choice B is wrong because individual competitive firms cannot set prices. Choice D unrealistically assumes costs can be offset by efficiency gains.

Question 6

In a perfectly competitive market, technological improvements reduce production costs for all existing firms but create barriers that prevent new firms from accessing this technology. What is the most likely long-run outcome for existing firms?

  1. Existing firms will earn zero economic profit as competition among them drives price down to their new, lower average total cost
  2. Existing firms will earn positive economic profit indefinitely since new firms cannot enter to compete away these profits (correct answer)
  3. Existing firms will earn negative economic profit as they compete aggressively to gain market share using the new technology
  4. Existing firms will coordinate to maintain high prices and share the benefits of lower costs equally among themselves
Explanation: With lower production costs, existing firms can produce at lower ATC. However, since barriers prevent new firms from accessing the technology, entry cannot occur to compete away the profits. In a typical competitive market, entry would drive profits to zero, but here the technological barriers create a situation where existing firms can maintain positive economic profits long-term. Choice A describes normal competitive equilibrium but ignores the entry barriers. Choice C incorrectly suggests firms would incur losses when they have cost advantages. Choice D describes collusion, which is inconsistent with perfect competition assumptions.

Question 7

A firm in a perfectly competitive market has a total cost function of TC=2q2+10q+50TC = 2q^2 + 10q + 50. If the current market price is $25, which of the following actions should the firm take in the short run?

  1. Produce 3.75 units, accepting an economic loss. (correct answer)
  2. Shut down immediately, as the price is below the average total cost.
  3. Produce 5 units, as this is the quantity where price equals average total cost.
  4. Increase its price to $35 to cover its average total cost at the optimal output.
Explanation: To find the optimal output, set price equal to marginal cost (MC). MC is the derivative of TC, so MC=4q+10MC = 4q + 10. Setting P=MCP = MC: 25=4q+10⇒4q=15⇒q=3.7525 = 4q + 10 \Rightarrow 4q = 15 \Rightarrow q = 3.75. To determine if the firm should produce, compare the price to the average variable cost (AVC). VC=2q2+10qVC = 2q^2 + 10q, so AVC=2q+10AVC = 2q + 10. At q=3.75q = 3.75, AVC=2(3.75)+10=17.50AVC = 2(3.75) + 10 = 17.50. Since P = \25 > AVC = $17.50,thefirmshouldproduce.Tocheckforprofit/loss,calculateaveragetotalcost(ATC)., the firm should produce. To check for profit/loss, calculate average total cost (ATC). ATC = 2q + 10 + 50/q.At. At q=3.75,, ATC = 2(3.75) + 10 + 50/3.75 = 7.5 + 10 + 13.33 = 30.83.Since. Since P = $25 < ATC = $30.83$, the firm is making an economic loss but should still produce because it is covering its variable costs.

Question 8

The market for organic carrots is perfectly competitive and in long-run equilibrium. A new medical study reveals significant health benefits of organic carrots, causing a permanent increase in demand.

Based on the passage, what is the immediate short-run consequence for a typical carrot-producing firm and the subsequent long-run market adjustment?

  1. Firms' costs will increase in the short run, leading to market exit in the long run.
  2. The price increase will be permanent, and firms will earn long-run economic profits.
  3. Firms will earn positive economic profits in the short run, leading to market entry and a decrease in price in the long run. (correct answer)
  4. Firms will break even in the short run, leading to no change in the market structure in the long run.
Explanation: The permanent increase in demand will shift the market demand curve to the right, causing the market price to rise in the short run. For the typical firm, this new price will be above its average total cost, leading to positive economic profits. These short-run profits will attract new firms to enter the market. The entry of new firms shifts the market supply curve to the right, which in turn causes the market price to fall. This process continues until the price returns to the minimum average total cost, and economic profits are competed away, restoring long-run equilibrium.

Question 9

The market for artisanal coffee pods is a perfectly competitive, constant-cost industry currently in long-run equilibrium. A change in consumer preferences leads to a permanent increase in market demand. After all long-run adjustments are made, how will the new equilibrium price and total market output compare to the initial equilibrium?

  1. The price will be the same as the initial price, but total market output will be greater. (correct answer)
  2. Both the price and total market output will be greater than their initial levels.
  3. The price will be greater than the initial price, but total market output will be the same.
  4. The price will be lower due to economies of scale, and total market output will be greater.
Explanation: In a constant-cost industry, the long-run supply curve is perfectly elastic (horizontal). An increase in demand initially raises the price, creating short-run profits. These profits attract new firms to enter. Because it is a constant-cost industry, the entry of new firms does not increase input prices, so the cost curves of individual firms do not shift. Entry continues, shifting the market supply curve to the right until the price is driven back down to the original long-run equilibrium level (the minimum of average total cost). The result is a greater total quantity sold in the market at the same original price.

Question 10

The market for rare earth mineral mining is a perfectly competitive, increasing-cost industry in long-run equilibrium. A surge in demand for electric vehicle batteries permanently increases the demand for these minerals. After all long-run adjustments are made, what is the state of the new long-run equilibrium?

  1. The equilibrium price will be higher, and total market output will be greater. (correct answer)
  2. The price will return to its original level, but total market output will be greater.
  3. Firms will earn positive economic profits in the new long-run equilibrium.
  4. Both the price and the quantity of output produced by each individual firm will be higher.
Explanation: In an increasing-cost industry, the entry of new firms bids up the price of scarce inputs (e.g., specialized labor, mineral rights). The permanent increase in demand initially raises the price and creates profits. New firms enter, increasing the demand for inputs and causing their prices to rise. This shifts the cost curves (ATC and MC) for all firms upward. Entry continues until profits are zero, which now occurs at a higher market price corresponding to the new, higher minimum average total cost. The overall market output increases to meet the higher demand.

Question 11

A firm in a perfectly competitive industry is in a long-run equilibrium where price equals minimum average total cost. The firm's owner, reviewing the financial statements, notes that economic profit is zero. Which course of action is most advisable for the firm?

  1. Exit the market to find an industry where it can earn positive economic profits.
  2. Increase its price slightly to achieve a small positive economic profit.
  3. Continue operating at the current level, as the firm is covering all its costs, including opportunity costs. (correct answer)
  4. Reduce production to lower its total costs and thereby increase profit.
Explanation: Zero economic profit is the hallmark of a long-run competitive equilibrium. It means the firm's total revenues are exactly equal to its total costs, where total costs include both explicit (accounting) costs and implicit (opportunity) costs. This means the firm is earning a normal rate of return and its resources could not be used more profitably in any other alternative venture. Therefore, there is no incentive to exit the industry. Exiting to seek positive economic profits is speculative, as such profits are competed away in other competitive markets as well.

Question 12

Two pizzerias, A and B, operate in a perfectly competitive market. Pizzeria A rents its oven for a high monthly fee but buys cheap ingredients (high fixed costs, low variable costs). Pizzeria B owns a simple, inexpensive oven but uses premium, costly ingredients (low fixed costs, high variable costs). The market price of pizza suddenly drops, causing both firms to operate at a loss. Which of the following is most likely to occur in the short run?

  1. Pizzeria A is more likely to shut down than Pizzeria B.
  2. Pizzeria B is more likely to shut down than Pizzeria A. (correct answer)
  3. Both firms will continue to operate as long as they are covering any portion of their fixed costs.
  4. Both firms will shut down immediately since they are making losses.
Explanation: The short-run shutdown decision is based on whether price (P) is less than average variable cost (AVC). Pizzeria A has low variable costs, meaning its AVC is relatively low. Pizzeria B has high variable costs, meaning its AVC is relatively high. When the market price drops, it is more likely to fall below Pizzeria B's higher AVC than Pizzeria A's lower AVC. Therefore, Pizzeria B is more likely to reach its shutdown point and cease production in the short run. The level of fixed costs is irrelevant to the short-run shutdown decision.

Question 13

The toy manufacturing industry is perfectly competitive and in long-run equilibrium. A new technology becomes available that significantly lowers the average total cost of production for any new firm entering the market. Existing firms, with older factories, cannot adopt this technology. What is the most likely long-run outcome in this market?

  1. The original firms will adopt the new technology and earn higher profits.
  2. The market price will remain the same, but new firms will share the market with original firms.
  3. New firms will enter, the market price will decrease, and the original firms will eventually exit. (correct answer)
  4. The government will likely intervene to protect the original firms from the new competition.
Explanation: The new technology gives potential entrants a cost advantage. Their minimum average total cost is lower than the current market price (which equals the minimum ATC of the old firms). New firms will enter the market, attracted by the opportunity for profit. Their entry will increase the market supply, driving the market price down. The price will continue to fall until it reaches the minimum ATC of the new, low-cost firms. At this new, lower market price, the original firms will find that price is below their own minimum ATC, forcing them to incur losses and eventually exit the market.

Question 14

The market for freelance transcription services is perfectly competitive. A university system outsources all its transcription needs, causing a permanent increase in market demand. In the short run, the price per page and the profits of existing firms increase. However, after a year, the price has returned to its original level, while more transcription is being done overall. What can be inferred about this industry?

  1. It is an increasing-cost industry.
  2. It is a decreasing-cost industry.
  3. The initial price increase was caused by a temporary supply shortage.
  4. It is a constant-cost industry. (correct answer)
Explanation: This question tests your understanding of industry cost structures in perfectly competitive markets, particularly how input costs behave when industry output expands permanently. The key insight is in the long-run outcome: after a year, price returns to its original level despite higher total output. In perfect competition, long-run equilibrium occurs where price equals minimum average total cost. Since price returned to exactly its original level, this tells you that the minimum average total cost for firms hasn't changed, even though the industry is now producing more. This is the defining characteristic of a constant-cost industry—input prices remain stable as the industry expands, keeping firms' cost curves unchanged. Let's examine why the other answers miss the mark. Choice A (increasing-cost industry) would mean input prices rise as the industry expands, causing firms' cost curves to shift upward. This would result in a permanently higher long-run price, not a return to the original price. Choice B (decreasing-cost industry) would cause input prices to fall as the industry grows, leading to lower costs and a permanently lower long-run price than originally. Choice C (temporary supply shortage) misinterprets the scenario entirely—this wasn't about a supply disruption but rather a permanent demand increase. When analyzing industry types, focus on what happens to the long-run equilibrium price after the market fully adjusts. If it returns to the original level, you're dealing with constant costs; if it's permanently higher or lower, you're looking at increasing or decreasing costs, respectively.

Question 15

A perfectly competitive firm's marginal cost function is MC = 2Q + 4, where Q is output. If the market price is $20 and the firm's average variable cost at the profit-maximizing output level is $12, what can be concluded about the firm's short-run and long-run decisions?

  1. The firm produces 8 units, should continue operating short-run, but needs information about fixed costs for long-run decisions (correct answer)
  2. The firm produces 8 units, earns positive economic profit, and should continue operating in both short and long run
  3. The firm produces 10 units, covers variable costs, but will exit in the long run due to insufficient profit margins
  4. The firm should shut down immediately since marginal cost exceeds average variable cost at all positive output levels
Explanation: Setting P = MC: 20=2Q+4,solvinggivesQ=8units.Sinceprice(20 = 2Q + 4, solving gives Q = 8 units. Since price (20) exceeds AVC ($12), the firm covers variable costs and should continue operating in the short run. However, to determine long-run viability, we need to know if price covers average total cost, which requires information about fixed costs that isn't provided. Choice B assumes profitability without knowing ATC. Choice C incorrectly calculates output (uses wrong equation setup). Choice D is wrong because the firm clearly covers AVC, and the relationship between MC and AVC is irrelevant for the shutdown decision.

Question 16

A perfectly competitive industry experiences a decrease in the prices of key inputs used by all firms. Simultaneously, consumer preferences shift away from the industry's product. If the cost reduction effect is stronger than the demand reduction effect on equilibrium price, what will happen to firm entry/exit decisions in the long run?

  1. Firms will exit the industry because lower consumer demand reduces long-run profitability despite cost savings
  2. Entry and exit decisions depend on individual firm efficiency rather than market-wide cost and demand changes
  3. No entry or exit will occur since the opposing effects cancel out, maintaining the original equilibrium
  4. Firms will enter the industry because lower costs create profit opportunities that outweigh the demand reduction (correct answer)
Explanation: When analyzing firm entry and exit decisions in perfectly competitive markets, you need to focus on how changes affect long-run economic profits. In perfect competition, firms enter when they can earn positive economic profits and exit when facing losses. Here, you have two simultaneous shifts: lower input costs (which shifts supply right and reduces production costs) and decreased consumer demand (which shifts demand left). The question tells you the cost reduction effect dominates, meaning equilibrium price falls, but firms' production costs fall even more dramatically. The correct answer is D because when input costs decrease more than price falls, each firm's profit margin per unit increases. Even though total market demand is lower, individual firms can now produce at much lower costs, creating profit opportunities. These positive economic profits will attract new firms to enter the industry in the long run. Answer A incorrectly assumes that lower demand automatically means lower profitability, ignoring that profitability depends on the relationship between price and cost, not just demand levels. Answer B is wrong because in perfectly competitive markets, all firms face identical market prices and input costs, so market-wide changes affect all firms similarly. Answer C misunderstands that "opposing effects" don't mean no net change in profitability – the relative strength of each effect determines the outcome. Remember: in perfect competition questions, always trace through how changes affect the profit margin (price minus average cost) to predict entry/exit decisions. Lower costs can create profit opportunities even in shrinking markets.

Question 17

A perfectly competitive firm is currently producing at a profit-maximizing level of output. The government imposes a new annual licensing fee on all firms in the industry. How will this fee affect the firm's output in the short run and its decision to stay in the market in the long run?

  1. Short-run output will decrease, and the firm is more likely to exit in the long run.
  2. Short-run output will not change, and the long-run decision is unaffected.
  3. Short-run output will decrease, and the long-run decision is unaffected.
  4. Short-run output will not change, but the firm is more likely to exit in the long run. (correct answer)
Explanation: An annual licensing fee is a fixed cost because it does not vary with the level of output. An increase in fixed costs raises average total cost (ATC) but does not affect marginal cost (MC) or average variable cost (AVC). The short-run profit-maximizing output is determined by the intersection of price and marginal cost (P = MC). Since neither P nor MC changes, the short-run output level remains the same. However, the increase in ATC reduces the firm's profit (or increases its loss). This makes it more likely that the price will be below the new, higher ATC, leading the firm to exit in the long run.

Question 18

A wheat farmer, operating in a perfectly competitive market, sells wheat at a price of $7 per bushel. The farm is producing an output level where marginal cost is $7, average total cost is $8, and average variable cost is $6. Which statement accurately describes the farmer's situation?

  1. The farm should shut down immediately to minimize its losses.
  2. The farm should increase its price to $8 to cover all its costs.
  3. The farm is minimizing its economic loss by producing in the short run but will exit in the long run. (correct answer)
  4. The farm is maximizing profit and should plan to expand production to achieve economies of scale.
Explanation: The farmer is producing at the profit-maximizing (or loss-minimizing) quantity because price equals marginal cost (P = MC = \7).Theshort−rundecisionistooperateif). The short-run decision is to operate if P \ge AVC.Since. Since P = $7 > AVC = $6,thefarmshouldcontinuetooperate.However,thefarmismakinganeconomiclossbecause, the farm should continue to operate. However, the farm is making an economic loss because P = $7 < ATC = $8$. This loss-making position is not sustainable in the long run. Therefore, the farm will exit the industry if the price remains at $7.

Question 19

A competitive firm finds that at its profit-maximizing output level, the market price is $30, its average total cost is $35, and its average variable cost is $25. Which of the following provides the best rationale for the firm's short-run decision?

  1. Shut down, because the firm cannot cover its total costs and is therefore making a loss.
  2. Increase the selling price to $35 to break even on each unit sold.
  3. Continue to produce, because the revenue from each unit sold covers its variable costs and contributes to paying fixed costs. (correct answer)
  4. Continue to produce, because the firm must expect the market price to rise in the future.
Explanation: The firm should operate in the short run if the price is greater than or equal to the average variable cost. Here, P = \30 > AVC = $25.Thismeansthatforeachunitsold,thefirmreceives$30,whichcoversthe$25invariablecostsandleaves$5toapplytowarditsfixedcosts.Ifthefirmweretoshutdown,itwouldloseitsentirefixedcost.Byproducing,itslossissmaller.Thelossperunitis. This means that for each unit sold, the firm receives $30, which covers the $25 in variable costs and leaves $5 to apply toward its fixed costs. If the firm were to shut down, it would lose its entire fixed cost. By producing, its loss is smaller. The loss per unit is P - ATC = $30 - $35 = -$5,whichislessthanthefixedcostperunitof, which is less than the fixed cost per unit of ATC - AVC = $35 - $25 = $10$.

Question 20

A perfectly competitive firm is producing 100 units of a good at a market price of $10 per unit. At this level of output, the firm's average total cost is $12 and its average variable cost is $8. Which of the following correctly describes the firm's short-run and long-run decisions?

  1. Shut down in the short run and exit in the long run.
  2. Continue to operate in the short run but exit in the long run. (correct answer)
  3. Continue to operate in the short run and expand production in the long run.
  4. Shut down in the short run but re-enter if the price increases in the long run.
Explanation: In the short run, a firm decides whether to produce or shut down by comparing price (P) to average variable cost (AVC). Here, P = \10andandAVC = $8.Since. Since P > AVC,thefirmshouldcontinuetooperatebecauseitiscoveringitsvariablecostsandcontributingtofixedcosts.Inthelongrun,afirmdecideswhethertostayinthemarketorexitbycomparingpricetoaveragetotalcost(ATC).Here,, the firm should continue to operate because it is covering its variable costs and contributing to fixed costs. In the long run, a firm decides whether to stay in the market or exit by comparing price to average total cost (ATC). Here, P = $10andandATC = $12.Since. Since P < ATC$, the firm is making an economic loss and should exit the market in the long run if conditions do not improve.