Question

A pencil manufacturer is in a perfectly competitive market. The firm can sell as much as it wants at a price of $1.50 per pencil. At some production levels, its average variable costs are less than $1.50, but there is not production level where its average total cost is equal or less than $1.50. What would be your recommendation to the pencil manufacturer?

Answer 1

Answer: That means that the company is losing profits, therefore I would recommend continuing to produce in the short term, so that you do not lose more as it would be if you stop producing.

In the long term, unless prices go up or costs go down, I would recommend the pencil manufacturer not to continue producing and going out of business.