A Firm Sells a Product in a Purely Competitive Market

question 87

Multiple Choice

A firm sells a product in a purely competitive market. The marginal cost of the product at the current output of 800 units is $3.50. The minimum possible average variable cost is $2.00. The market price of the product is $4.00. To maximize profits or minimize losses, the firm should

• A)continue producing 800 units.
• B)continue production, but reduce output.
• C)increase production.
• D)shut down.

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Definitions:

Break-even Point

The point at which total costs and total revenues are exactly the same, yielding neither a profit nor a loss.

Degree of Operating Leverage

The degree of operating leverage is a financial ratio that measures the sensitivity of a company's operating income to its sales, indicating how earnings before interest and taxes are affected by sales volume.

Fixed Expenses

Costs that do not vary with the level or amount of goods or services produced or sold.

Contribution Margin

The difference between sales revenue and variable costs, used to cover fixed costs and profits.