Suppose a risk-neutral competitive firm must produce output before the market price is known.If the uncertain price is given by p = p* + e,where e is a random term with an expected value of zero,a competitive firm should shut down in the short run if:

Question

Quizplus · Accepted Answer

In the short run, a competitive firm should shut down if the price (p) is less than the average variable cost (AVC). This is because the firm will not be able to cover its variable costs and will incur losses even if it continues to produce. Hence, if p* (the expected market price) is less than AVC, the firm should shut down in the short run.

Suppose a Risk-Neutral Competitive Firm Must Produce Output Before the Market