A firm sells a product in a purely competitive market. The marginal cost of the product at the current output of 2,400 units is $5.50. The minimum possible average variable cost is $2.60. The market price of the product is $4.70. To maximize profits or minimize losses, the firm should
A)continue production, but reduce output..
B)shut down..
C)increase production..
D)continue producing 2,400 units..

Question

Quizplus · Accepted Answer

To maximize profits or minimize losses, a firm should continue production if the price covers the average variable cost (AVC) and adjust output to the point where price equals marginal cost (MC). Here, since the market price ($4.70) is above the minimum AVC ($2.60) but below the MC ($5.50) at the current output, the firm should reduce output to decrease the MC to match the market price.

A Firm Sells a Product in a Purely Competitive Market