Question

In: Economics

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 2 years ago
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