Suppose that once a well is dug,water flows out of it continuously without any additional effort.Customers collect their water and pay a per gallon fee when they leave the site of the well.In the short run,the competitive firm in this market
A) will not shut down because variable costs are zero.
B) has no fixed costs.
C) faces diminishing marginal returns.
D) can act as a price setter.

Question

Quizplus · Accepted Answer

In the short run, since the water flows continuously, the variable costs are zero for the firm as they do not need to put in any effort or resources to extract the water. Therefore, they will not shut down even if the revenue is not sufficient to cover their fixed costs. The firm may operate at a loss in the short run but can cover their fixed costs in the long run by earning a profit. The other options, such as having no fixed costs, facing diminishing marginal returns, or acting as a price setter, do not apply to this scenario.

Suppose That Once a Well Is Dug,water Flows Out of It