Suppose a price-taking firm produces 400 units at its optimal output level. At that output rate, marginal cost is $200, average total cost is $240, and average variable cost is $170. The firm will be forced to go out of business in the short run if: Select one:a. the market price is between $200 per unit and $240 per unit. b. the market price is between $170 per unit and $240 per unit. c. the market price falls below $170 per unit. d. the market price equals $240 per unit. e. the market price equals $200 per unit.

Question

Proctor

Business

2 December, 21:35

Suppose a price-taking firm produces 400 units at its optimal output level. At that output rate, marginal cost is $200, average total cost is $240, and average variable cost is $170. The firm will be forced to go out of business in the short run if: Select one:a. the market price is between $200 per unit and $240 per unit. b. the market price is between $170 per unit and $240 per unit. c. the market price falls below $170 per unit. d. the market price equals $240 per unit. e. the market price equals $200 per unit.

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Answers (1)

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Alan Davies · Answer 1

C) the market price falls below $170 per unit.

Explanation:

If this firm is a price taker, it means that it is operating in a perfect competition market. In such markets, since the entry and exit barriers are very low or nonexistent, if the equilibrium price falls below the variable cost, the firms should halt production in the short run until the equilibrium price rises again. The firm should resume production only after the equilibrium price exceeds the variable costs.

This situation is only applicable on the short run. On the long run the firm should only produce if the equilibrium price is greater or equal to its marginal cost.