If price falls below minimum average variable cost,the best a firm can do is

Question

Quizplus · Accepted Answer

If the price falls below the minimum average variable cost, the firm cannot cover even its variable costs. Hence, it is better for the firm to stop production and incur a loss equal to total fixed cost. This way, the firm can minimize its losses and avoid incurring further variable costs. Choosing option A or B would result in additional variable costs and a larger loss for the firm. Option D is not viable as it would cause the firm to incur a loss equal to all variable costs, not just those that have already been incurred. Option E would result in the firm continuing to produce at a loss, which again incurs more losses for the firm.

If Price Falls Below Minimum Average Variable Cost,the Best a Firm