Table 14-5
A firm in a competitive market has the following cost structure:

-Refer to Table 14-5.If the market price is $4,what will this firm do

Question

Table 14-5
A firm in a competitive market has the following cost structure:
 
-Refer to Table 14-5.If the market price is $4,what will this firm do

Quizplus · Accepted Answer

In the short run, the firm should produce the quantity where the price (P) is greater than or equal to the average variable cost (AVC), in order to minimize losses. In this case, at a market price of $4, the AVC is $3, which means the firm should produce at least 3 units to cover all variable costs and some fixed costs. Producing 2 units would result in a total loss of $2 (=$4*2-$17), while producing 3 units would result in a total loss of $3 (=$4*3-$23). However, in the long run, if the market price remains at $4, the firm should exit the market as it cannot cover all of its costs, including fixed costs, in the long run.

Table 14-5 A Firm in a Competitive Market Has the Following Cost