Question

A perfectly competitive firm that makes car batteries has a fixed cost of $10,000 per month. The market price at which it can sell its output is $100 per battery. The firm’s minimum AVC is $105 per battery. The firm is currently producing 500 batteries a month (the output level at which MR = MC). This firm is making a _____________ and should _______________ production.

Answer 1

The correct answer is: loss; shut down.

Step-by-step explanation:

The fixed cost of making car batteries is $10,000/month.

The market price is $100/battery.

The equilibrium quantity is 500 batteries.

The firm’s minimum AVC is $105 per battery.

The price is not able to cover the minimum AVC.

This implies that the firm is having losses. The firm will thus stop producing and exit the market.