Question:
A firm in a perfectly competitive industry has: Output = 500 units, Price = Rs. 6, Total cost = Rs. 5000, Total fixed cost = Rs. 1000, Marginal cost = Rs. 6. The firm should
(1) reduce output but keep producing.
(2) increase its selling price.
(3) leave output unchanged.
(4) reduce output to zero.
(5) increase output but keep its price constant.
Correct Answer:
(4)
Answer Explanation:
First, find Total Variable Cost: TVC = TC – TFC = 5000 – 1000 = 4000. Next, find Average Variable Cost: AVC = TVC / Output = 4000 / 500 = 8. The market price is Rs. 6. According to the shut-down rule, if Price (6) < AVC (8), the firm cannot cover its daily operating costs and must shut down immediately (reduce output to zero) to minimize losses.
Topic: Firm Theory Year: 2017
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