If average variable cost is greater than price, a profit maximizing firm in a perfectly competitive...

If average variable cost is greater than price, a profit maximizing firm in a perfectly competitive market should *

continue to produce its current output level.

shut down in the short run.

increase its output level to minimize its loss.

none of the above.

Solutions

Expert Solution

Option B.

In a perfectly competitive market, profit maximizing firms always tend to maximize their profits by selling an output quantity where marginal cost equals marginal revenue.
At this point, until their price exceeds the average variable cost, the firms continue to produce as they earn profits.
But when the price falls below the average variable cost, the firms start to incur losses.
At this point, the firm's start to shut down the production in the short run.

Rahul Sunny answered 1 year ago

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