In a perfectly competitive market, the market price is $23. At the current level of output, a firm has a marginal cost of $28. What should the firm do?

Question

Quizplus · Accepted Answer

In a perfectly competitive market, firms are price takers, meaning they cannot set the price of their product. If the marginal cost ($28) is higher than the market price ($23), the firm is losing money on each additional unit produced. Therefore, to minimize losses, the firm should produce less output. Raising prices (B) is not an option in a perfectly competitive market, and producing more (E) would increase losses. Shutting down (D) is a more drastic step that might be considered if the firm cannot cover its variable costs, but the question does not provide enough information to conclude that this is the case.

In a Perfectly Competitive Market, the Market Price Is $23