A pencil manufacturer is in a perfectly competitive market.The firm can sell as much as it wants at a price of $1.50 per pencil.At some production levels,its average variable costs are less than $1.50,but there is not production level where its average total cost is equal or less than $1.50.What would be your recommendation to the pencil manufacturer.

Question

Quizplus · Accepted Answer

In the short run, the firm should continue production as long as it covers its variable costs. However, in the long run, if the firm cannot produce at a cost lower than the market price, it will not be able to earn economic profits and should exit the market. The only exception would be if the firm expects prices to rise or costs to fall in the future, allowing it to earn profits in the long run. Therefore, the best option is to continue production in the short run but exit the business in the long run unless prices are expected to rise or costs to fall.

A Pencil Manufacturer Is in a Perfectly Competitive Market