Multiple Choice
Which of the following strategies would most likely be utilized by a market challenger in a competitive market?
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3. The Market Forces of Supply and Demand
Competitive Markets
Multiple Choice
In a competitive market, the firm should produce in the short run as long as the price:
A
is greater than marginal cost (MC) at all output levels
B
is less than average total cost (ATC)
C
is equal to average fixed cost (AFC)
D
is greater than or equal to average variable cost (AVC)
Verified step by step guidance1
Understand the shutdown rule in the short run: A firm will continue to produce as long as it can cover its variable costs, even if it cannot cover total costs, because fixed costs are sunk in the short run.
Recall that the firm's decision to produce depends on comparing the market price (P) to the average variable cost (AVC). If the price is at least equal to AVC, the firm covers its variable costs and contributes something towards fixed costs.
Recognize that if the price is below AVC, the firm would minimize losses by shutting down immediately, since producing would add more to losses than not producing.
Note that the condition 'price greater than marginal cost (MC) at all output levels' is incorrect because firms produce where P = MC, not necessarily greater at all levels.
Also, understand that price being less than average total cost (ATC) or equal to average fixed cost (AFC) does not determine the short-run production decision; the key comparison is between price and AVC.
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