Question

If a purely competitive firm is currently facing a situation where the price of its product is lower than the average variable cost, but it believes that the market demand for its product will increase soon, then ________.
A) the firm will shut down in the short run and leave the industry in the long un.
B) the firm will shut down in the short run, but stay in the industry in the long run if it expects the product price to rise high enough soon.
C) the firm will produce a low level of output in the short run but expand its plant in the long run as demand increases.
D) the firm will produce a low level of output in the short run and leave the industry in the long run.

Answer 1

Answer: B) the firm will shut down in the short run, but stay in the industry in the long run if it expects the product price to rise high enough soon.

Explanation:

If a purely competitive firm is currently facing a situation where the price of its product is lower than the average variable cost, but it believes that the market demand for its product will increase soon, then the firm will shut down in the short run, but stay in the industry in the long run if it expects the product price to rise high enough soon.

Answer 2

Answer:

B) the firm will shut down in the short run, but stay in the industry in the long run if it expects the product price to rise high enough soon.

Explanation:

For a company to keep producing any product the price must at least be equal or preferably higher than the average variable production costs. If the price is lower than the average variable production cost, the company will choose to shut down production ate least temporarily. If the company believes that the price will increase in the future, they should decide to stay in the industry until the price increases and then resume the production.