If a perfectly competitive firm is facing a situation where the price of its product is lower than the average total cost, which of the following statements is true? Other firms will want to enter the industry because of the economic profits generated by the firm. The firm may earn economic profits in the long run if it expands its plant in order to exploit economies of scale. The firm may be earning some accounting profits, but less than what it could earn elsewhere. The firm is generating a loss, and if things are not expected to improve the firm will leave the industry.

Question

Business

Kailey Adkins

9 August, 17:00

If a perfectly competitive firm is facing a situation where the price of its product is lower than the average total cost, which of the following statements is true? Other firms will want to enter the industry because of the economic profits generated by the firm. The firm may earn economic profits in the long run if it expands its plant in order to exploit economies of scale. The firm may be earning some accounting profits, but less than what it could earn elsewhere. The firm is generating a loss, and if things are not expected to improve the firm will leave the industry.

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Answers (2)

Know the Answer?

Markus Maynard · Answer 1

If a perfectly competitive firm is facing a situation where the price of its product is lower than the average total cost, which of the following statements is true?

The fourth statement is true.

Explanation:

If a perfectly competitive firm is facing a situation where the price of its product is lower than the average total cost, then the firm is generating a loss, and if things are not expected to improve the firm will leave the industry.

Statement 4 is correct.

Renee Trevino · Answer 2

D) The firm is generating a loss and if things are not expected to improve the firm will leave the industry.

Explanation:

A perfectly competitive firm can make only one major decision which is naming the quantity it wishes to produce. In determining profit, two items are necessarily required; Total revenue and total cost. This can mathematical be represented as total revenue - total cost. Another way of determining profit is denoted mathematically as: - (Price * Quantity Produced) - (Average Cost * Quantity produced). Since a perfectly competitive firm must come to terms with the price for its output as determined by the product's demand and supply, it can't choose the price it charges. This can only be determined in the profit equation. When the firm chooses the quantity to produce, this quantity and the prices will determine the firm's total revenue, total costs and profits.

If the price that a perfectly competitive firm charges is higher than its average cost of production for quantity produced, the firm tends to earn profits but if the price is lower than its average cost of production, the firm will suffer losses. In this situation, liquidation might be one of the firm's options.