A firm sells a product in a purely competitive market. The marginal cost of the product at the current output of 200 units is $4.00. The average variable cost is $3.50. The market price of the product is $3.00. To maximize profits or minimize losses, the firm should
A) continue to produce 200 units.
B) continue production, but produce less than 200 units.
C) increase production to more than 200 units.
D) shut down.

Question

Quizplus · Accepted Answer

Since the price ($3.00) is less than the average variable cost ($3.50), the firm is making a loss on each unit produced. Therefore, the best option is for the firm to minimize its losses by shutting down in the short run.

A Firm Sells a Product in a Purely Competitive Market