Question

Suppose Bobby's bait company is an oligopolistic producer of fishing lures. He produces at the profit-maximizing level of output, and the PRICE is below ATC but above AVC.

Option 1: Bobby is making a loss
Option 2: Bobby is making a profit
Option 3: Bobby should increase production
Option 4: Bobby should exit the market

Answer 1

Bobby's bait company is making a loss because the price is below ATC but above AVC. He should continue producing to cover variable costs and some fixed costs. Exiting the market or increasing production are not immediately recommended unless market conditions change.

Step-by-step explanation:

When analyzing Bobby's bait company, which operates in an oligopolistic market producing fishing lures and is currently producing at the profit-maximizing level of output, there are several factors to consider. Since the price is below the average total cost (ATC) but above the average variable cost (AVC), it indicates that Bobby's company is making losses in the short run. However, since the price is still above the AVC, Bobby should continue producing in the short run to cover the variable costs and some portion of the fixed costs.

Therefore, the correct answer is that Bobby is making a loss (Option 1). Option 3 (Bobby should increase production) can be disregarded unless a change in market conditions suggests that increasing production would allow the price to exceed ATC. Option 4 (Bobby should exit the market) would not be considered unless the price falls below the AVC, in which case continuing production would lead to larger losses than shutting down and bearing only the fixed costs.