Which of the following statements best reflects the production decision of a profit-maximizing firm in a competitive market when price falls below the minimum of average variable cost?
A)The firm will continue to produce to attempt to pay fixed costs.
B)The firm will immediately stop production to minimize its losses.
C)The firm will stop production as soon as it is able to pay its sunk costs.
D)The firm will continue to produce in the short run but will likely exit the market in the long run.

Question

Quizplus · Accepted Answer

When the price falls below the minimum of average variable cost, the firm cannot cover its variable costs and will minimize losses by stopping production immediately.

Which of the Following Statements Best Reflects the Production Decision