Assume a perfectly competitive firm sells its output for $150 per unit.It currently produces 6,000 units of output, at which output level it minimizes its average variable cost at $152 per unit.Assuming it wants to maximize its profits, it should:

Question

Quizplus · Accepted Answer

Since the current output level is producing at a cost greater than the revenue, the firm is making losses. The firm would minimize its losses by shutting down and producing no output. This is because the firm’s fixed costs are sunk in the short run and must be paid regardless of output levels. Hence, by shutting down, the firm can avoid variable costs and prevent further losses.

Assume a Perfectly Competitive Firm Sells Its Output for $150