In perfect competition market, what will be your decision if Price equal to the Average Varaible...

In perfect competition market, what will be your decision if Price equal to the Average Varaible cost. explain in DETAIL the reason.

Expert Solution

When the price is equal to the average variable cost this means that the price is set at mini of average variable cost or at a point where the marginal cost curve intersects the average variable cost. Now when the price is equal to average variable cost , this means that the firm should continue its operation because the money it will loose by shutting down is higher than the money it will loose by continuing producing output levels. Although it is not able to recover it's fixed cost, but it is efficient enough to recover the variable costs. Hence if the price falls below the minimum of average variable cost, then the firm should shut down because it is incapable of recovering both fixed and variable cost. But if the price is greater or equal to average variable cost, it should continue it's operations because according to the shut down rule, firms continue it's production as long as price is greater or equal to the average variable cost.

Rahul Sunny answered 2 years ago

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