The Razor-Thin Disposable Razor Company is a perfectly competitive firm producing where MR = MC. The current market price of a disposable razor is $3.00. The firm sells 1,800 disposable razors. Its AVC is $4.00 and its AFC is $1.50. What should Razor-Thin do?
A) Continue to produce because price exceeds AFC.
B) Shut down and produce zero razors because price is less than AVC.
C) Decrease production so that AVC will decrease.
D) Increase production so that AFC will decrease.

Question

Quizplus · Accepted Answer

In a perfectly competitive market, if the price is below the average variable cost (AVC), the firm should shut down in the short run because it cannot cover its variable costs. Here, the price ($3.00) is less than the AVC ($4.00), so Razor-Thin should shut down and produce zero razors.

The Razor-Thin Disposable Razor Company Is a Perfectly Competitive Firm