If a firm in a perfectly competitive market is operating at its profit-maximizing level of output and suddenly faces a reduction in the price it can charge for its product,will the firm suspend operations?

Question

Quizplus · Accepted Answer

If the reduction in price still allows the firm to cover its variable costs (e.g. cost of materials, labor), it would still operate in the short run. This is because even if the firm is not making a profit, it is still generating revenue to cover its variable costs and some of its fixed costs. However, if the price reduction is so severe that it cannot cover its variable costs, then it may have to suspend operations in the short run. The firm could potentially raise its prices in the long run, but in the short run, it is constrained by its existing capacity and resources.

If a Firm in a Perfectly Competitive Market Is Operating