A firm in a competitive market has the following cost structure:
Output
Total Cost
0
$5
1
$10
2
$12
3
$15
4
$24
5
$40
If the market price is $4, this firm will
A)produce 2 units in the short run and exit in the long run.
B)produce 3 units in the short run and exit in the long run.
C)produce 4 units in the short run and exit in the long run.
D)shut down in the short run and exit in the long run.

Question

Quizplus · Accepted Answer

The firm will produce where marginal cost equals market price. At 3 units, the marginal cost is $3 (from $12 to $15), which is less than the price, so the firm will produce 3 units. However, since the price is below average total cost, the firm will exit in the long run.

A Firm in a Competitive Market Has the Following Cost