Question

A startup firm in a perfectly competitive market finds that its average total cost is higher than the market price. Since the firm is incurring​ short-run losses, the management is debating whether to continue operations. Alex​ Ferguson, a senior​ manager, feels that this is a temporary phase and the firm should continue operations. Which of the​ following, if​ true, would weaken​ Alex's argument?

A. A few of the existing competitors have raised the prices of their products. B. The firm is under great pressure from its investors to make sound economic decisions. C. The demand for most goods and services in the economy has been increasing at a steady pace in the last two years. D. The price of the main component of the​ firm's product is expected to increase. E. The firm is experiencing economies of scale.

Answer 1

Option d is correct

Option A will not result in increasing their sales because product sold is identical and consumers will purchase from lower price seller. Option B will support Alex argument and will not weaken it. Option C indicates that price will increase so this is a temporary phase and it will support Alex argument. Option E will also not support because economies of scale will have reduced average total cost. However in case of option D, if the price of main component is going to increase the average total cost will increase and hence waiting will not an option.