Question

​If, for a given output​ level, a perfectly competitive​ firm's price is less than its average variable​ cost, the firm A. should increase price. B. should shut down. C. is earning a profit. D. should increase output.

Answer 1

B. should shut down.

Step-by-step explanation:

In the short run, if price is less than average variable cost, the firm should shut down; cease production temporarily. It would be better for the firm to shut down than to continue production and earn losses. If output is increased, average variable cost increases and loss increases.

A perfect competition firm is a price taker so it cannot adjust the price for its products.