Suppose a profit-maximizing firm in a competitive market produces rubber bands. When the market price for rubber bands falls below the minimum of its average total cost, but still lies above the minimum of average variable cost, in the short run the firm will
A)experience losses but will continue to produce rubber bands.
B)shut down.
C)earn both economic and accounting profits.
D)raise the price of its product.

Question

Quizplus · Accepted Answer

When the market price falls below the minimum of average total cost but still lies above the minimum of average variable cost, the firm is still covering its variable costs and is better off continuing to produce and sell rubber bands. While the firm will experience losses in the short run, it would be even worse off if it shut down and incurred additional costs associated with restarting operations in the future. Therefore, Option A is the most appropriate choice. Option B is not ideal because shutting down would result in higher costs in the long run. Option C is not possible since the market price is below the average total cost, and Option D is not possible since the firm is not a price setter in a competitive market.

Suppose a Profit-Maximizing Firm in a Competitive Market Produces Rubber