Suppose a firm in a purely competitive market discovers that the price of its product is above its minimum AVC point but everywhere below ATC. Given this, the firm
A) minimizes losses by producing at the minimum point of its AVC curve.
B) maximizes profits by producing where MR = ATC.
C) should close down immediately.
D) should continue producing in the short run but leave the industry in the long run if the situation persists.

Question

Quizplus · Accepted Answer

The firm should continue producing in the short run as long as the price is above its minimum AVC point, which means it can cover its variable costs. However, since the price is below ATC, the firm is still making losses in the short run. If the situation persists in the long run, the firm should leave the industry to avoid further losses.

Suppose a Firm in a Purely Competitive Market Discovers That