If the Price of Its Product Falls Below the Minimum

question 344

Multiple Choice

If the price of its product falls below the minimum point on the AVC curve, the best a perfectly competitive firm can do is to

• A) keep producing and incur an economic loss equal to its total variable cost.
• B) keep producing and incur an economic loss equal to its total fixed cost.
• C) shut down and incur an economic loss equal to its total variable cost.
• D) shut down and incur an economic loss equal to its total fixed cost.

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Definitions:

Contribution Margin

The amount by which a product's sales revenue exceeds its variable costs, indicating how much contributes to covering fixed costs and generating profit.

Production Capacity

The maximum amount of goods or services that can be produced in a given period under normal working conditions.

Lost Contribution Margin

The amount of contribution margin that is not realized due to not selling a product or service, often calculated as the sales price minus variable costs for the unsold units.

Commercial Security Division

A branch within a corporation focused on providing security services and solutions to businesses and commercial properties.