You are hired as an economic consultant to The Pampered Pet Shop. The Pampered Pet Shop operates in a perfectly competitive industry. This firm is currently producing at a point where market price equals its marginal cost. The Shop's total revenue exceeds its total variable cost, but is less than its total cost. You should advise the firm to
A) cease production immediately because it is incurring a loss.
B) lower its price so that it can sell more units of output.
C) produce in the short run to minimize its loss, but exit the industry in the long run.
D) raise its price until it breaks even.

Question

Quizplus · Accepted Answer

In a perfectly competitive market, firms cannot control prices; they are price takers. If the market price equals marginal cost and total revenue exceeds total variable cost but is less than total cost, the firm is covering its variable costs and contributing to fixed costs, minimizing losses. However, if it cannot cover total costs in the long run, it should exit the industry.

You Are Hired as an Economic Consultant to the Pampered