Microeconomics: The Theory of the Firm under Perfect Competition · Class 11 · CBSE · Commerce Economics
In the short run, the market price of a product is ₹5 per unit, while the minimum average variable cost of a perfectly competitive firm is ₹7 per uni…
Practice question from Microeconomics: The Theory of the Firm under Perfect Competition (Class 11 · CBSE · Commerce Economics), with the correct answer and a step-by-step solution.
hard · MCQ · Q-1ED7B5
In the short run, the market price of a product is ₹5 per unit, while the minimum average variable cost of a perfectly competitive firm is ₹7 per unit. What should the firm do?
- A.Continue producing because price is positive.
- B.Shut down temporarily because price is below minimum average variable cost.Correct answer
- C.Increase output until average total cost is minimised.
- D.Produce where average variable cost equals marginal cost, regardless of price.
Solution
A firm shuts down in the short run when price is below minimum AVC because it cannot cover its variable costs. By producing zero output, it limits its loss to fixed cost.
More from Microeconomics: The Theory of the Firm under Perfect Competition
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