The owner of Tie-Dyed T-shirts, a perfectly competitive firm, hires you to give him economic advice. He tells you that the market price for his shirts is $15 and that he is currently producing 200 shirts at an
AVC of $10 and an
ATC of $20. You tell him he should continue to operate in the short run because
◦ he is earning an economic profit of $4,000.
◦ his loss from operating in only $2,000 which is less than his loss if he shuts down.
◦ he has to pay this fixed costs of $2,000 if he shuts down which is greater than his loss when he operates.
◦ In fact you do not tell him to operate—he should shut down since he has a loss.
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