Suppose that in a perfectly competitive industry, the market price for the product is $130. A firm is producing the output level at which average total cost equals marginal cost, both of which are $138. Average variable cost is $132. To maximize profits in the short run, the firm should
A) expand its output.
B) shut down.
C) reduce its output.
D) change the price of the product.
E) leave its output unchanged.

Question

Quizplus · Accepted Answer

In the short run, a perfectly competitive firm should shut down if the price is less than the minimum of average variable cost. In this case, the price of $130 is less than the minimum of average variable cost which is $132. Therefore, the firm should shut down to minimize its losses. This is because if it were to continue producing, it would incur a loss of $8 per unit ($138 - $130).

Suppose That in a Perfectly Competitive Industry, the Market Price