Multiple Choice
In a competitive market, which strategy is most likely to help a new business compete against similar well-established businesses in a community?
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3. The Market Forces of Supply and Demand
Competitive Markets
Multiple Choice
In a competitive market, Orchid is deciding between four production tiles, each with different costs. Which tile should Orchid choose to minimize costs?
A
The tile with the lowest sunk cost
B
The tile with the highest fixed cost
C
The tile with the lowest marginal cost
D
The tile with the highest average total cost
Verified step by step guidance1
Understand the concept of cost minimization in a competitive market: A firm aims to produce at the lowest possible cost to maximize profit or minimize losses.
Recall the definitions of different cost types: Fixed costs are costs that do not change with output, sunk costs are costs that have already been incurred and cannot be recovered, marginal cost is the additional cost of producing one more unit, and average total cost is the total cost divided by the quantity produced.
Recognize that sunk costs should not affect current production decisions because they cannot be changed or recovered; thus, choosing based on sunk costs is not optimal.
Understand that fixed costs, while important for total cost, do not affect the cost of producing additional units, so choosing based on the highest fixed cost is not cost minimizing.
Focus on marginal cost because it directly affects the cost of producing additional units; minimizing marginal cost leads to minimizing total production costs in a competitive market.
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