Firms should exit the market if:
A) sunk costs are a significant portion of the total cost.
B) producer surplus is just equivalent to recoverable costs.
C) price falls below the average cost.
D) marginal cost exceeds the average cost.

Question

Quizplus · Accepted Answer

When the price falls below the average cost of production, the firm incurs losses on each unit produced. Continuing to produce at a loss is not sustainable in the long run, and it is better for the firm to exit the market. Option A is not a sufficient condition for exit since sunk costs are irrelevant for decision making. Option B refers to the break-even point and does not give a clear indication of exit. Option D is a sign that the firm is not operating efficiently, but it may still be able to cover its fixed costs and some of its variable costs.

Firms Should Exit the Market If