If a perfectly competitive firm is producing at the output level where marginal revenue is equal to marginal cost and at this output level, the firm's average variable cost is $3 and the market price is $2, the firm______ .

Question

Quizplus · Accepted Answer

In a perfectly competitive market, the firm should produce at the output level where marginal revenue is equal to marginal cost. However, if the market price is lower than the firm's average variable cost, it means that the firm is not generating enough revenue to even cover its variable costs, let alone fixed costs. Therefore, the firm should shut down in the short run to minimize its losses, as it would be better off not producing anything at all.

If a Perfectly Competitive Firm Is Producing at the Output