Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
The likelihood of rain
B
The overall cost of the umbrella
C
The color of the umbrella
D
The brand of the umbrella
Understanding the Answer
Let's break down why this is correct
Answer
In a perfectly competitive market, a firm might choose to keep producing even when it faces losses, as long as the price it receives for its product is higher than its average variable cost. This situation is similar to a person deciding to keep using an umbrella in light rain, even if they aren't enjoying it, because the umbrella is still protecting them from getting wet. Just like the firm continues production to cover its variable costs and minimize losses, the person uses the umbrella to avoid discomfort, even if it's not perfect. If the price falls below the average variable cost, the firm would stop production, just as a person might stop using an umbrella if it stops raining entirely. In both cases, the decision is about minimizing negative effects based on current circumstances.
Detailed Explanation
Just like a person uses an umbrella when it might rain, a firm continues to produce if it can cover its variable costs. Other options are incorrect because Some might think the total cost matters, but it doesn't; The color seems important, but it doesn't affect the need for protection from rain.
Key Concepts
Production decisions in short-run economics
Average variable cost
Market dynamics
Topic
Short-Run Production Decisions
Difficulty
easy level question
Cognitive Level
understand
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