A competitive firm will exit an industry in the long run when the market price falls below its
A) marginal revenue.
B) marginal cost.
C) average cost.
D) average variable cost.

Question

Quizplus · Accepted Answer

When the market price falls below the firm's average cost, it means that they are not able to cover their total cost of production which includes both fixed and variable costs. At this point, the firm will be making losses and if it continues to operate, it will be further increasing its losses. Therefore, in the long run, the firm will exit the industry to avoid further losses. Marginal revenue and marginal cost do not include fixed costs which are an important aspect of the firm's total cost. Average variable cost does not cover fixed costs and can be covered by selling the product at the market price but when the firm is not able to cover its average cost, it means that it cannot even cover its fixed costs which will lead to exiting the industry.

A Competitive Firm Will Exit an Industry in the Long