When a competitive firm finds that the market price is below its minimum average variable cost level, it will sell:

(A) The output where average total costs equal price

(B) Nothing a all, he firm shuts down

(C) The output level where marginal revenue equals marginal cost

(D) Any positive output the entrepreneur decides upon because all of it can be sold

Question

Fury

Business

11 February, 07:13

When a competitive firm finds that the market price is below its minimum average variable cost level, it will sell:

(A) The output where average total costs equal price

(B) Nothing a all, he firm shuts down

(C) The output level where marginal revenue equals marginal cost

(D) Any positive output the entrepreneur decides upon because all of it can be sold

+2

Answers (1)

Know the Answer?

Nathaly Blake · Answer 1

The correct answer is option B.

Explanation:

In the perfect co petition firm is a price taker. Firms do not decide price. Price is determined by demand and supply intersection. Firms face a horizontal demand curve. They can only adjust the quantity they supply.

In a perfect competition, if the price is not able to cover the average variable cost, it means that the firm will be incurring losses. The firm will thus shutdown and stop production.