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3 Management decisions for a perfectly competitive firm

1. Should a perfectly competitive firm making a loss in the short-run always leave the market? Why or why not? What about in the long-run?

2. Should a perfectly competitive firm advertise in an effort to increase its sales and its profits? Why or why not?

3. Can you think of an example of a perfectly competitive firm? Why do you think this firm is perfectly competitive?

Solution Preview

1. No. If the market price falls to a point where a perfectly competitive firm is making a loss, it should shut down temporarily to minimize its losses in the hope that the market price rises again. If the price does not rise in the long run, then the firm should leave the market.

2. No. The goal of ...

Solution Summary

This solution addresses three decisions that must be made by the manager of a perfectly competitive firm:
1. Should a loss-making firm leave the market?
2. Can a perfectly competitive firm increase its revenues by advertising?
3. What is an example of a perfectly competitive firm, and why?

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