Will a profit-maximising firm in a competitive market produce a positive level of output in the short run if the market price is less than the minimum of AVC? Give an explanation.
No, a profit-maximising firm in a competitive market will not produce a positive level of output in the short run if the market price is less than the minimum of AVC.
When the market price falls below the minimum AVC, the firm cannot cover its variable costs at any output level. For all positive output levels, the AVC strictly exceeds the market price. This means the firm would incur losses on variable costs for every unit produced, in addition to its fixed costs.
A profit-maximising firm aims to minimise losses. If the firm produces at an output level where market price is lower than AVC, the total revenue would be insufficient to cover even the variable costs. In such a situation, the firm minimises its losses by shutting down and producing zero output.
This is why the firm's short run supply curve consists of the rising part of the SMC curve from and above the minimum AVC, together with zero output for all prices strictly less than the minimum AVC.
Thus, when market price is less than the minimum of AVC, the profit-maximising decision is to produce zero output in the short run.
Explanation
The textbook clearly establishes this through Case 2 in section 4.4.1. When market price (p2) is less than minimum AVC, the context states that 'for all positive output levels, AVC strictly exceeds p2' and therefore 'it cannot be the case that the firm supplies a positive output.' The firm's short run supply curve explicitly shows 'zero output for all prices strictly less than the minimum AVC.' This is because producing any positive output would mean the firm cannot even cover variable costs, making shutdown the rational choice.