If a perfectly competitive firm's total revenue is less than its total variable cost, the firm
A)should raise its price above its average variable cost.
B)should continue to produce and increase its demand.
C)should stop production by shutting down temporarily.
D)should adopt new technology in order to lower its costs of production.

Question

Quizplus · Accepted Answer

If a perfectly competitive firm's total revenue is less than its total variable cost, then the firm is not covering its variable costs and is making a loss on each unit produced. In such a case, it is optimal for the firm to shut down temporarily and stop production altogether. This would help the firm minimize its losses in the short term. Continuing to produce and increasing demand would only lead to more losses, and raising the price above the average variable cost would not be effective since consumers would switch to other firms offering similar products at lower prices. Adopting new technology to lower the costs of production would only be effective in the long run and may not be feasible in the short term.

If a Perfectly Competitive Firm's Total Revenue Is Less Than