Question

Suppose a perfectly competitive firm is in the following situation: P = $10, output = 3,000, ATC = $11, MC = $10, and AVC = $7.50. Which statement is an accurate description of the firm's situation? The firm incurs profits but should increase output to maximize its profits. The firm incurs losses but should shut down to lose less. The firm incurs losses but is also minimizing its losses. The firm incurs losses but should increase output to lose less.

Answer 1

The firm incurs losses but is also minimizing its losses.

Step-by-step explanation:

Assuming fixed prices, the company's marginal revenue is $10. Since the average total cost is $11, which is greater than the marginal revenue of $10, the company is operating at a loss. However, the firm is minimizing its losses by operating at an output level in which marginal cost equals marginal revenue (MC = MR = $10), any change in output would increase losses.

Therefore, the answer is: The firm incurs losses but is also minimizing its losses.