A firm operating in a perfectly competitive market finds itself producing at an output level for which marginal revenue is lower than marginal cost.In order to maximize profits (or minimize losses),the firm should

Question

Quizplus · Accepted Answer

When marginal revenue is lower than marginal cost, the firm is not covering its variable costs (let alone fixed costs), and is incurring losses. In order to minimize these losses, the firm should decrease its level of output to a point where marginal revenue equals marginal cost (i.e. where it no longer incurs losses). If the firm were to increase its level of output, it would increase its losses as it would be selling each unit for a price lower than its cost of production. Shutting down operations would be appropriate if the firm cannot cover its fixed costs at any output level. Lowering prices would further decrease the firm's already negative profit margin, and raising prices would make it impossible for the firm to compete in a perfectly competitive market where all firms charge the same price.

A Firm Operating in a Perfectly Competitive Market Finds Itself