20) What will a firm in a perfectly competitive industry do in the short-run if the price of its product decreases below the firm's average variable costs but still above average total costs? A) Do nothing B) Increase production C) Decrease production D) Shut down

ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
icon
Related questions
Question
### Question 20:
**What will a firm in a perfectly competitive industry do in the short-run if the price of its product decreases below the firm’s average variable costs but still above average total costs?**

**A) Do nothing  
B) Increase production  
C) Decrease production  
D) Shut down**

---

**Explanation:**
This multiple-choice question addresses the decision-making process for firms in a perfectly competitive market regarding production levels based on changes in the product price relative to the firm’s costs. 

In a perfectly competitive industry, firms are price takers and therefore must respond to market price changes. The decision hinges on the comparison between the market price and various cost metrics, specifically the average variable costs (AVC) and average total costs (ATC).

1. **Do nothing:** The firm's decision to maintain current production levels if the price covers at least its average variable costs.
2. **Increase production:** Typically not advisable if the price is below the current level of average variable costs, as increasing production would elevate losses.
3. **Decrease production:** Might be considered to reduce losses if production costs exceed revenue.
4. **Shut down:** This option is considered if the price drops below the average variable costs, meaning the firm is unable to cover these costs and would incur losses on every unit produced.

The correct answer involves understanding the interplay between fixed and variable costs, and the firm’s goal to minimize losses in the short term while potentially reconsidering long-term operations. 

For this scenario, the firm’s price is less than the AVC but still above the ATC, implying the firm is covering more than just the variable costs but not the total costs. Therefore, the appropriate action needs careful analysis of marginal costs and revenue to determine loss minimization.
Transcribed Image Text:### Question 20: **What will a firm in a perfectly competitive industry do in the short-run if the price of its product decreases below the firm’s average variable costs but still above average total costs?** **A) Do nothing B) Increase production C) Decrease production D) Shut down** --- **Explanation:** This multiple-choice question addresses the decision-making process for firms in a perfectly competitive market regarding production levels based on changes in the product price relative to the firm’s costs. In a perfectly competitive industry, firms are price takers and therefore must respond to market price changes. The decision hinges on the comparison between the market price and various cost metrics, specifically the average variable costs (AVC) and average total costs (ATC). 1. **Do nothing:** The firm's decision to maintain current production levels if the price covers at least its average variable costs. 2. **Increase production:** Typically not advisable if the price is below the current level of average variable costs, as increasing production would elevate losses. 3. **Decrease production:** Might be considered to reduce losses if production costs exceed revenue. 4. **Shut down:** This option is considered if the price drops below the average variable costs, meaning the firm is unable to cover these costs and would incur losses on every unit produced. The correct answer involves understanding the interplay between fixed and variable costs, and the firm’s goal to minimize losses in the short term while potentially reconsidering long-term operations. For this scenario, the firm’s price is less than the AVC but still above the ATC, implying the firm is covering more than just the variable costs but not the total costs. Therefore, the appropriate action needs careful analysis of marginal costs and revenue to determine loss minimization.
Expert Solution
steps

Step by step

Solved in 2 steps

Blurred answer
Knowledge Booster
Profits
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
Economics
ISBN:
9780190931919
Author:
NEWNAN
Publisher:
Oxford University Press
Principles of Economics (12th Edition)
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (MindTap Course List)
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-…
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education