A perfectly competitive firm, Paula's Pineapple Farm, is incurring a loss. In the short run it should continue to produce if ________, but in the long run, if there is no change in economic conditions, it should exit the industry.
A) price is below minimum AVC
B) price is above minimum ATC
C) price is above minimum AVC
D) price is equal to minimum ATC

Question

Quizplus · Accepted Answer

In the short run, a firm should continue to produce as long as the price covers its average variable costs (AVC), even if it's incurring losses, because it can still cover some of its fixed costs. Exiting the industry is a long-term decision, typically made if the firm cannot cover its average total costs (ATC) in the long run.

A Perfectly Competitive Firm, Paula's Pineapple Farm, Is Incurring a Loss