### 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.

Short-run: - it is a short time period in which some factors of production are variable and some are…

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

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

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