Question

Consider a profit-maximizing firm operating in a perfectly competitive industry. If the equilibrium market price of the good falls below the minimum of the firm's average total cost curve but is greater than the minimum of its average variable cost curve, what will the firm do?

1) Continue producing in the short run
2) Shut down in the short run
3) Increase production in the short run
4) Decrease production in the short run

Answer 1

final answer:

If the market price is below average variable cost, the firm should shut down immediately. If the market price is above average variable cost but below average cost, the firm should continue producing in the short run.

Step-by-step explanation:

If the market price that a perfectly competitive firm faces is below average variable cost at the profit-maximizing quantity of output, then the firm should shut down operations immediately. However, if the market price is above average variable cost but below average cost, then the firm should continue producing in the short run, but may exit the industry in the long run.