Question

If under perfect competition, if the price line lies below the average cost curve, the firm would ____________.

• A. make a normal profit
• B. incur losses
• C. make abnormal profit
• D. none of above

Answer 1

Answer: (B)

incur losses

In the short run the firm should continue in the business if P $\ge$ AVC, even if its not entirely covering its fixed costs. However if P is less than the AVC the firm should shut down in the short run. If in the long run the P is less than average cost (continues making losses) then the firm should exit the industry.