Pappy's Popcorn Emporium Operates in a Perfectly Competitive Industry and Hires

question 30

Multiple Choice

Pappy's Popcorn Emporium operates in a perfectly competitive industry and hires you as an economic consultant. Pappy's is currently producing at a point where market price equals its marginal cost. Its market price is greater than its average variable cost but less than its average total cost. You advise Pappy's to

• A) cease production immediately because it is not covering its operating costs.
• B) lower its price so that it can sell more units of output.
• C) produce in the short run to minimize its loss, but exit the industry in the long run.
• D) raise its price until it breaks even.

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Definitions:

Price Elastic

Describes a situation where the quantity demanded or supplied of a good or service changes significantly due to changes in its price. Highly elastic means a small price change makes a big difference in demand or supply.

Quantity Demanded

The total amount of a good or service that consumers are willing and able to purchase at a particular price.

Chocolate

A sweet, typically brown food preparation of Theobroma cacao seeds, roasted and ground, often flavored, as with vanilla, and used as a confection or as a flavoring ingredient.

Price Elasticity

A measure of how much the quantity demanded of a good responds to a change in the price of that good, indicating the sensitivity of demand to price changes.