If the price received by a perfectly competitive firm is less than its average variable cost, what will the firm do in the short run? Why?
What will be an ideal response?
If the price is less than the average variable cost, the firm will shut down in the short run. By shutting down, the firm will incur an economic loss equal to its fixed cost. Whereas if the firm operated, its economic loss would be larger. Therefore the firm minimizes its loss by shutting down.
You might also like to view...
Which of the following statements regarding OPEC is false?
A) Because it sells a homogeneous product, since its formation in 1960 OPEC has been the clear leader when it comes to determining the price of crude oil. B) OPEC's membership includes countries from the Middle East, Africa, and South America. C) Over time, OPEC's ability to control the price of oil has been constrained by changes in consumer demand and increased production of oil by non-member countries. D) The cartel has not always been successful when it comes to preventing individual members from cheating on the agreed upon production quotas.
For a monopsonist
a. wage rate > TLC b. wage rate > MLC c. wage rate = MLC d. wage rate = MRP e. wage rate < MLC
Students who major in computer science are paid a lot more when they graduate than those who major in philosophy because
A. The derived demand for computer science majors is less than the derived demand for philosophy majors. B. The marginal revenue product for computer science majors is less than the marginal revenue product for philosophy majors. C. Information technology is a growth industry. D. The search for the meaning of life is a growth industry.
When real output increases, planned aggregate expenditures increase because:
A. induced expenditures increase. B. autonomous expenditures increase. C. induced expenditures decrease. D. autonomous expenditures decrease.