Pappy's Popcorn Emporium operates in a perfectly competitive industry and hires you as an economic consultant. Pappy's is currently producing at a point where market price equals its marginal cost. Its market price is greater than its average variable cost but less than its average total cost. You advise Pappy's to
A) cease production immediately because it is not covering its operating costs.
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. Pappy's is covering its variable costs but not its total costs, indicating it should continue to produce in the short run to cover some of its fixed costs and minimize losses. However, if it cannot cover total costs in the long run, it should exit the industry.

Pappy's Popcorn Emporium Operates in a Perfectly Competitive Industry and Hires