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

In a purely competitive market, if the market price ($3.00) is below the average variable cost ($3.50), the firm should shut down in the short run to minimize losses, as it cannot cover its variable costs.

A Firm Sells a Product in a Purely Competitive Market