It will sometimes pay a firm to operate at a loss under perfect competition, so long as price covers:
A)average variable cost.
B)average cost.
C)marginal cost.
D)average fixed cost.
E)none of the above.

Question

Quizplus · Accepted Answer

Under perfect competition, firms are price takers and cannot control the market price. Hence, they can only adjust their output to maximize their profits. Sometimes, a firm may have to operate at a loss in the short run if the market price falls below the average cost of production. However, the firm should continue to operate as long as the price covers the average variable cost, which is the minimum cost to keep the firm in business in the short run. Therefore, the best choice is A - average variable cost.

It Will Sometimes Pay a Firm to Operate at a Loss