2 In the perfectly competitive guidebook industry the market

2. In the perfectly competitive guidebook industry, the market price is $30. A firm is currently producing 10,000 guidebooks; average total cost is $35, marginal cost is $28, and average variable cost is $32. The firm should: a. raise the price of guidebooks, because the firm is losing money. b. kee p output the same, because the firm is producing at minimum average variable cost. produce more guidebooks, because the next guidebook produced increases profit. shut down, because the market price is lower than the shutdown price. c. d. e. produce fewer guidebooks, because the next guidebook produced decreases profit by S8.

Solution

In a perfectly competitive market, the firm charges a price determined by the market. Here, a pice of $30 is being charged as the market demands. But, this price is lower than the firm\'s average variable cost of production.

A firm charges a price that goes to as low as the average variable cost of production. Beyond that point, that is, a point where price becomes lower than the average variable cots the firm is unable to cover even the variable cost of production and thus, chooses to shut down.

Shutdown Point => P = AVC

Here, Price = $30 < AVC = $32. Therefore, the firm chooses to shut down.

Thus, the correct answer is option d. shut down, because the market price is lower than the shutdown price.