Question

A startup firm in a perfectly competitive market finds that its average total cost is higher than the market price. Since the firm is incurring​ short-run losses, the management is debating whether to continue operations. Alex​ Ferguson, a senior​ manager, feels that this is a temporary phase and the firm should continue operations. Which of the​ following, if​ true, would support​Alex's argument?

A. The managers of the firm have worked for other firms that produced products with an even greater difference between average total cost and market price.

B. Other firms in the same industry have higher labor costs but lower raw material costs.

C. The current price of the product covers the variable cost of production.

D. Economic activity in recent months has been sluggish.

E. The price of the product is expected to remain stable over the coming months.

Answer 1

Answer:C. The current price of the product covers the variable cost of production.

Explanation:A perfectly Competitive market is market where all firms produce similar product,and none of the firm's is superior,all the firm's are price takers as they can not influence the market price.

A perfectly Competitive firm is a firm whose product demand changes at the slightest change in the price of the product,any firm that is perfectly Competitive will work with the already existing price level of the market for its products and services, a perfectly Competitive firm is also known as spruce taker as it is expected to sell According to the existing market price.

ALEX'S OPINION Will BE SUPPORTED IF TRUE ONLY IF THE CURRENT PRICE OF THE PRODUCT COVERS OR IT IS HIGHER THAN THE VARIABLE COST OF PRODUCING THE PRODUCT.