A firm sells a product in a purely competitive market. The marginal cost of the product at the current output of 200 units is $4.00. The average variable cost is $3.50. The market price of the product is $3.00. To maximize profits or minimize losses, the firm shouldA. Continue to produce 500 units
B. Produce less than 500 units
C. Produce more than 500 units
D. Shut down

D. Should Shut Down

Explanation:

A perfect competition firm is at profit maximising equilibrium where : Marginal Revenue [Price] = Marginal Cost .

If MR > MC : Firm's additional production is profitable, it tends to increase production. If MR < MC : Firm's additional production is loss making, it tends to decrease production.

However, If firm's Price i.e MR < Average Variable Cost : The firm's per unit price is even unable to cover it's per unit average variable cost. This situation is referred to as 'Shut Down' point & firm should close down its production in the case.

Given : MR = P = 3 ; MC = 4 ; AVC = 3.5 . The firm's price P (3) is not only lesser by its Marginal Cost MC (4), to decrease production ; but also lesser than its Average Variable Cost AVC (3.5) . So, the firm should shut down.

answer; common market;