Question

You are a consultant to a Pet Shop that operates in a perfectly competitive environment. The firm is currently producing at a point where market price equals its marginal cost. The Pet Shop's total revenue exceeds its total variable cost but is less than its total cost. you should advise Pet Shop to

A) continue in business.

B) lower its price so that it can sell more output.

C) raise its price to increase its profits.

D) quit business.

Answer 1

Option A.

• We know that a perfectly competitive market is a market structure characterized by large number of buyers and sellers selling identical goods and services.
• Firms in these industries are said to maximize their profits in short run and are usually tempted to exit in long run.
• If the pet shops total revenue exceeds its total variable cost but is less than its total cost, then I would advise the pet shop to continue in business in the short run inorder to minimise losses but exit in long run wen the total cost starts to exceed the total revenue.