Question:
Consider a farmer who grows banana operates in a perfectly competitive market. If the market price falls in the short run the farmer should
(1) increase the production until the new price equals average total cost.
(2) increase production to offset the fall in price.
(3) discontinue the production if the new price is less than marginal revenue.
(4) continue to produce only if the new price covers average fixed costs.
(5) continue to produce only if the new price covers average variable costs.
Correct Answer:
(5)
Answer Explanation:
According to the short-run shut-down rule, a firm should continue operating even if it is making a loss (Price < Average Total Cost), provided that the market price is still high enough to cover its Average Variable Costs (AVC). If the price falls below the AVC, the firm must shut down immediately to minimize its losses.
Topic: Firm Theory Year: 2019
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