Suppose the Price of an Item in a Perfectly Competitive

question 2

Multiple Choice

Suppose the price of an item in a perfectly competitive market is $2. For a firm in this market, MC = MR at an output of 100 units. The average total cost at this output level is $4 per unit, and TVC is $80. We may conclude that

• A) the firm should shut down because TC > TR.
• B) the firm should continue to produce because P>AVC.
• C) the firm should shut down because its TFC is $320 and its TC is $400.
• D) the firm should shut down because other firms will enter the industry as the market is perfectly competitive.

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Definitions:

Overstocking

The practice of holding more inventory than is necessary, often leading to excess stock that is difficult to sell.

Understocking

The condition where the inventory levels are too low, risking stockouts, lost sales, and dissatisfied customers.

Demand Mean

The average demand over a specified period of time.

Standard Deviation

A statistical measure that quantifies the amount of variation or dispersion in a set of numerical data, indicating how spread out the data points are from the mean.