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 market price is less than its average variable cost. You should advise the firm to
A) cease production immediately because it is not covering its variable costs of production.
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 set prices; they are price takers. If the market price is below the average variable cost, the firm is not covering its variable costs and should cease production immediately to minimize losses.

You Are Hired as an Economic Consultant to the Pampered