A perfectly competitive firm produces 3000 units of a good at a total cost of $36 000.The fixed cost of production is $20 000.The price of each good is $10.Should the firm continue to produce in the short run?
A)No, it should shut down because it is incurring a loss.
B)Yes, it should continue to produce because its price exceeds its average fixed cost.
C)Yes, it should continue to produce because it is minimising its loss.
D)There is insufficient information to answer the question.

Question

Quizplus · Accepted Answer

In the short run, a firm should continue to produce as long as it can cover its variable costs, even if it's incurring a loss, because shutting down would mean a loss equal to total fixed costs. Here, the variable cost is $16,000 ($36,000 total cost - $20,000 fixed cost), and the revenue from producing 3000 units at $10 each is $30,000. Since the revenue exceeds the variable cost, the firm is minimizing its loss by continuing to produce.

A Perfectly Competitive Firm Produces 3000 Units of a Good