Question

A pencil manufacturer is in a perfectly competitive market. The firm can sell as much as it wants at a price of $1.50 per pencil. At some production levels, its average variable costs are less than $1.50, but there is no production level where its average total cost is equal or less than $1.50. What would be your recommendation to the pencil manufacturer? a. Increase production to decrease fixed costs per unit. b. Exit the business immediately. c. Continue production both in the short run and in the long run. d. Continue production in the short run, but exit the business in the long run unless prices are expected to rise or costs to fall..

Answer 1

d. Continue production in the short run, but exit the business in the long run unless prices are expected to rise or costs to fall..

Step-by-step explanation:

Currently, their sales revenue less variable cost is positive as it can sale at $1.50 dollars and the variables cost are less than that. Therefore, there are fixed cost thefirm can pay because it produce.

Now, in the long-run when the firm can exit the market it should consider to do so if it continues to get an average cost above the selling price.