If a perfectly competitive firm finds that it is producing an output level where price is above...

Question:

If a perfectly competitive firm finds that it is producing an output level where price is above average variable cost but less than marginal cost, it should _____

A. increase its output

B. shut down.

C. decrease its price.

D. increase its price.

E. decrease its output

Perfectly Competitive Firm:

A perfectly competitive firm takes its selling price as set by the forces of demand and supply. Therefore, it cannot lower or increase its selling price and thus, its marginal revenue is equal to the market price.

Answer and Explanation: 1

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The correct answer is: E. decrease its output

Since P>AVC, the firm should not shutdown.

Perfectly competitive firms produce at the point where...

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Perfectly Competitive Market: Definition, Characteristics & Examples

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Chapter 3 / Lesson 63
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Learn the definition of perfect competition and understand how a perfectly competitive market works. Study the characteristics of a perfectly competitive market with examples.


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