A profit-maximising firm in a competitive market produces leather wallets.Suppose the market price for leather wallets drops below the minimum of its average total cost.However, the price still lies above the minimum of average variable cost.This means the firm:

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If the market price for leather wallets drops below the minimum of its average total cost, the firm will experience losses. However, as the price still lies above the minimum of average variable cost, it would still cover its variable costs and some of its fixed costs. Therefore, the firm will continue to produce wallets in the short-run despite the losses incurred. The firm may consider reducing production or exiting the market in the long-run if the losses persist. Switching to manufacturing leather handbags or raising the price of its product may not be the best options as they may not necessarily be profitable or feasible in this scenario.

A Profit-Maximising Firm in a Competitive Market Produces Leather Wallets