Suppose that Prince Puckler's Ice Cream sells 100 cones each day. It sells each cone for $3, its average variable cost is $2.50, marginal cost is $3, and the average total cost is $3.10. From this, one knows the firm:

The firm should continue operation

Explanation:

Under the production cost theory, the comparison of price (P) and average variable cost (AVC) is used to decide whether a firm should continue operation or shut down under the following two scenarios:

Scenario 1: If P > AVC, continue operation

Scenario 2: If P < AVC, shut down.

Under scenario 1, it is better for a firm to continue operation since P is greater than AVC. This implies that the firm can fully pay for its variable cost of production and partially pay  for a part of the fixed cost but not fully. As result, loss will be minimized by the firm if it continues operation.

Under scenario 2, the better decision for the firm is to shut down operation. The reason is that the firm is unable to even fully pay for its variable cost. In order to minimize cost, the firm is advised to shut down operation.

From the question, the $3 price of Prince Puckler's Ice Cream is greater than its $2.50 average variable cost. This implies that Prince Puckler falls under Scenario 1 above. Therefore, Prince Puckler should continue operation despite that the $3 prie is lower than $3.10 average total cost. This is because the variable cost will be fully covered while a part of the fixed cost will also be covered but not fully. Doing this will minimize total cost for Prince Puckler.

Therefore, one knows from the information in the question that the firm the firm should continue operation.

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