Question

A firm sells a product in a perfectly competitive market. The marginal cost of the product at the current output level of 200 units is $4. The minimum possible average variable cost is $3.50. The market price of the product is $3. To maximize profits or minimize losses, the firm should:

Answer 1

Answer:

Shut down

Explanation:

The minimum possible average variable cost is $3.50.

Variable cost represent the amount of cost that incurred every time the company produce one product.

The market price of the product is $3.

From this data alone, we can conclude that no matter how good the company's strategy to sell the product, it is impossible for the company to obtain profit. Since the cost of producing one product will always exceed the amount of profit that the company can obtain.

Closing down the operation or transitioning to other product will be the best option for the company.