In a perfectly competitive market,the market price is $8.An individual firm is producing the output at which MC = $8.AVC at that output is $10.What should the firm do to maximize its economic profit in the short run?

Question

Quizplus · Accepted Answer

In the short run, a perfectly competitive firm should produce as long as Price (P) is greater than or equal to Average Variable Cost (AVC) at the profit maximizing output level where Marginal Cost (MC) equals Price (P). In this case, the AVC is $10 which is greater than the market price of $8. This means that the firm is not covering its variable costs and hence is making losses. Therefore, it should shut down in the short run by producing zero output since it cannot cover its variable costs.

In a Perfectly Competitive Market,the Market Price Is $8