Figure 6.2
-Figure 6.2 shows the cost structure of a firm in a perfectly competitive market. Suppose the current market price is $10 and the firm produces the profit maximizing output level. If the firm's total fixed cost increases due to a new government regulation, the short-run response of the firm should be to Note: since the question does not restrict the firm's response to the short run, we can't rule out that the rise in fixed cost will push the firm below the breakeven point and that the firm will exit the industry in the long run, thus decreasing its current output level.

Question

Quizplus · Accepted Answer

In the short run, a firm in a perfectly competitive market will continue to produce its current output level if the market price covers its variable costs, even if total fixed costs increase. This is because fixed costs do not affect the marginal cost of production, which determines the profit-maximizing output level in the short run.

Figure 6.2 -Figure 6.2 Shows the Cost Structure of a Firm in Firm