A firm sells a product in a purely competitive market. The marginal cost of the product at the current output is $4 and the market price is $4.5. What should the firm do?
A)shut down if the minimum possible average variable cost is below $4.5
B)decrease output if the minimum possible average variable cost is below $4.5
C)increase output if the minimum possible average variable cost is below $4.50
D)increase output if the minimum possible average variable cost is above $4.5

Question

Quizplus · Accepted Answer

Since the market price ($4.5) is higher than the marginal cost ($4), the firm should increase output to maximize profit. The condition regarding the average variable cost is not directly relevant to the decision to increase output in this context.

A Firm Sells a Product in a Purely Competitive Market