If a perfectly competitive firm finds that the profit maximizing output level occurs where price is equal to marginal cost but is less than average variable cost
A)the firm will continue to operate in the short run since total revenue exceeds total variable cost but will exit the industry in the long run
B)the firm will continue to operate in the short run since it has to pay the total fixed cost whether or not it continues to operate
C)the firm will increase its selling price to raise revenue in order to be able to continue to operate profitably in the short run
D)the firm will shut down in the short run and exit the industry in the long run if it does not foresee market conditions changing

Question

Quizplus · Accepted Answer

In a perfectly competitive market, if the price (which equals marginal cost at the profit-maximizing output) is less than the average variable cost, the firm is not covering its variable costs and thus will incur a smaller loss by shutting down than by continuing to operate. This decision applies to the short run. In the long run, if the firm does not anticipate an improvement in market conditions that would allow it to cover its variable and fixed costs, it will exit the industry.

If a Perfectly Competitive Firm Finds That the Profit Maximizing