A perfectly competitive firm faces a price of $40 for the output it produces. Average Variable...

A perfectly competitive firm faces a price of $40 for the output it produces. Average Variable Cost for the firm is equal to $30 per unit and the firm's average fixed cost is equal to $20 per unit. Determine if the following statement is either True or False. The firm earns negative profits and should should shut down.

Solutions

Expert Solution

As we know, the firm in the perfect competition should not shut down despite the losses if it is able to cover the variable cost of the production, and in this case, we can see that price is greater than the average variable cost of the production, therefore, the firm should not shut down in the short run despite the negative profits as it is able to cover the variable cost of the production, so the given statement is false.

Rahul Sunny answered 1 year ago

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