A firm sells a product in a purely competitive market.The marginal cost of the product at the current output of 200 units is $4.00.The average variable cost is $3.50.The market price of the product is $3.00.To maximize profits or minimize losses, the firm should
A)continue to produce 200 units.
B)continue production, but produce less than 200 units.
C)increase production to more than 200 units.
D)shut down.

Question

Quizplus · Accepted Answer

The firm should shut down because the market price ($3.00) is less than the average variable cost ($3.50), meaning the firm is not covering its variable costs and would minimize losses by ceasing production.

A Firm Sells a Product in a Purely Competitive Market