Which of the Following Statements Best Reflects the Production Decision

question 73

Multiple Choice

Which of the following statements best reflects the production decision of a profit-maximizing firm in a competitive price-taker market when price falls below the minimum of average variable cost?

• A) The firm will continue to produce to attempt to pay fixed costs.
• B) The firm will stop production to minimize its losses.
• C) The firm will stop production as soon as it is able to pay its sunk costs.
• D) The firm will continue to produce in the short run but will likely exit the market in the long run.

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Definitions:

Long Run

Long run refers to a time period in economics where all inputs or factors of production can be adjusted, allowing an analysis of long-term planning or investment outcomes.

Monopolistic Competitor

A monopolistic competitor is a firm that has many competitors in a market but differentiates its product or service enough to have some control over its price.

Tex-Mex Restaurant

A type of dining establishment that serves a fusion cuisine of Texan and Mexican origins, characterized by its hearty, flavorful dishes.

Local Phone Company

A telecommunications provider that offers services within a specific geographic area, typically handling local calls and access.