When profit-maximising firms in competitive markets are making losses:

Question

Quizplus · Accepted Answer

When profit-maximizing firms in competitive markets are making losses, it typically indicates that the market price is below the average cost of production for some firms. This situation encourages the most inefficient firms, those with the highest costs, to exit the market to minimize their losses. This process helps to restore the market to a new equilibrium where only the more efficient firms remain, potentially leading to a situation where firms can cover their costs and earn normal profits. Choices A, B, and D do not directly relate to the scenario of firms making losses.

When Profit-Maximising Firms in Competitive Markets Are Making Losses