Question

You have recently been hired to advise the owners of Kenfield Insect Ltd. (KIL), which operates in a perfectly competitive industry. KIL is currently producing at a point where market price equals its marginal cost; KIL's total revenue is less than its total cost but exceeds its total variable cost. What advice should you provide KIL's owners?

a. Shut down immediately because it is incurring a loss.

b. Reduce prices in order to sell more units of output.

c. Raise its price until it breaks even and then begins making profit.

d. Continue production in the short run to minimize losses, but exit the industry in the long run.

Answer 1

Ans) the correct option is d) Continue production in the short run to minimize losses, but exit the industry in the long run.

Since total revenue is able to cover the total variable cost so the firm should continue to produce in the short run but will exit in the long run