A firm in a perfectly competitive industry is producing in the short run where i

Question

A firm in a perfectly competitive industry is producing in the short run where industry price equals its short run marginal cost. In this position, each representative firm is producing 100 units of output with total revenue of $5,500; total short run cost [fixed plus variable] of $9,000 and total fixed cost of $3,000. The firm's best profit strategy in the short run is to:
a) maintain output at its present level
b) increase output until marginal cost equals minimum average variable cost
c) increase output until marginal cost equals the minimum point of average total costs
d) shut down
e) none of the above

why choose D

Explanation / Answer

The firm is in the position of P=MC which means the firm has maximized its profit when producing 100 units. Therefore, b and c are not correct. In addition, total variable cost = 9000-3000=6000 which is greater than its total revenue. The firm cannot even cover its short run expenses, it's losing money all the time even at its profit-maximizing output. So, d is the right one.

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