When a perfectly competitive firm finds that its market price is below its minimum average variable cost, it will sell
A)the output where marginal revenue equals marginal cost.
B)any positive output the entrepreneur decides upon because all of it can be sold.
C)nothing at all; the firm shuts down.
D)the output where average total cost equals price.

Question

Quizplus · Accepted Answer

When the market price falls below the minimum average variable cost, the firm incurs losses on every unit produced. In such a scenario, the firm cannot cover even its variable costs, let alone fixed costs. Therefore, the best option for the firm is to shut down and produce nothing to avoid further losses. This situation is known as a short-run shutdown point for a perfectly competitive firm.

When a Perfectly Competitive Firm Finds That Its Market Price