Which of the following statements best reflects the production decision of a profit-maximizing firm in a competitive market when price falls below the minimum of average variable cost?

Select one:

A. The firm will continue to produce to attempt to pay fixed costs.

B. The firm will immediately stop production to minimize its losses.

C. The firm will stop production as soon as it is able to pay its sunk costs.

D. The firm will continue to produce in the short run but will likely exit the market in the long run.

Question

Business

Tristen

20 April, 14:21

Which of the following statements best reflects the production decision of a profit-maximizing firm in a competitive market when price falls below the minimum of average variable cost?

Select one:

A. The firm will continue to produce to attempt to pay fixed costs.

B. The firm will immediately stop production to minimize its losses.

C. The firm will stop production as soon as it is able to pay its sunk costs.

D. The firm will continue to produce in the short run but will likely exit the market in the long run.

+2

Answers (1)

Know the Answer?

Yahir Lawrence · Answer 1

B) The firm will immediately stop production to minimize its losses.

Explanation:

At least in the short run the company will stop production since the contribution margin will be negative: variable costs are higher than selling price, so the company is losing money with every unit it produces.

The company should start producing again as soon as the price increases again and the contribution margin is positive. This way the company will at least be able to cover some of its fixed costs.