If a competitive firm cannot earn profit at any level of output during a given short-run period,then which of the following is LEAST likely to occur?
A) It will shut down in the short run and wait until the price increases sufficiently.
B) It will exit the industry in the long run.
C) It will operate at a loss in the short run.
D) It will minimize its loss by decreasing output so that price exceeds marginal cost.

Question

Quizplus · Accepted Answer

In the short run, if a firm cannot earn a profit at any level of output, it will not decrease output to make the price exceed marginal cost because it would contradict the principle of minimizing losses by producing where price equals marginal cost. Instead, it might shut down if the price is below average variable cost, exit in the long run if the situation doesn't improve, or operate at a loss if the price covers the average variable cost but not the average total cost.

If a Competitive Firm Cannot Earn Profit at Any Level