A firm sells a product in a purely competitive market.The marginal cost of the product at the current output is $5.00 and the market price is $5.00.What should the firm do?

Question

Quizplus · Accepted Answer

In a competitive market, if the price is equal to the marginal cost, the firm is making zero economic profit. In this case, if the average variable cost is greater than the market price, the firm should shut down in the short run, as it would incur losses. In this case, the minimum possible average variable cost is $5.25, which is greater than the market price of $5.00. Therefore, the firm should shut down. Option B and Option C are incorrect because they suggest continuing production, either at the same level or increasing it, which would lead to losses. Option D is also incorrect because decreasing output would not change the fact that the firm is incurring losses.

A Firm Sells a Product in a Purely Competitive Market