📚 Learning Guide
Short-Run Production Decisions
easy

In a perfectly competitive market, the decision of a firm to continue production despite losses is to the average variable cost as the decision of a person to keep using an umbrella is to what?

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Learning Path
Learning Path

Question & Answer
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Choose 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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