Suppose a perfectly competitive firm is producing a level of output such that its average revenue is less than its lowest average variable cost. The firm should
A) not change its output.
B) increase the market price.
C) expand its output.
D) reduce its output.
E) shut down.

Question

Quizplus · Accepted Answer

If the average revenue is less than the lowest average variable cost, then the firm is not covering its variable costs and is incurring losses. In such a scenario, continuing to produce and sell would only make the losses worse. Therefore, the best option for the firm would be to shut down in the short run, as it would minimize the losses.

Suppose a Perfectly Competitive Firm Is Producing a Level of Output