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Turkey farming is a perfectly competitive industry and all turkey farms have the same cost curves. When the market price is $28 a turkey, farms maximize profit by producing 700 turkeys a week. At this output, average total cost is $26 a turkey, and average variable cost is $25 a turkey. Minimum average variable cost is $18 a turkey.
If the price falls to $26 a turkey, will a turkey farm produce 700 turkeys a week?
If the price falls to $26 a turkey, a turkey farm will _______.
A. close down operations
B. produce more than 700 turkeys a week
C. stop producing until the price returns to $28 a turkey
D. continue to produce 700 turkeys a week
E. produce fewer than 700 turkeys a week

Answer :

If the price falls to $26 a turkey, a turkey farm will D. continue to produce 700 turkeys a week

In a perfectly competitive market, a firm will continue to produce as long as the price is greater than or equal to its average variable cost (AVC). Given that the price of turkeys falls from $28 to $26, we need to compare this new price to the farm's AVC.

The average total cost (ATC) at the current production level of 700 turkeys is $26, and the AVC is $25 per turkey. Since the offered price of $26 is above the AVC of $25, but equal to the ATC, the farm will not be making any profit, but it will still cover all variable costs and some fixed costs.

Therefore, the farm will continue to produce and will not shut down. Given that we aim to maximize profit or minimize losses by producing where price equals marginal cost (P = MC), the firm will still operate at the same output level.

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