Asked by Nhickart Besar on Sep 23, 2024
Verified
A firm sells 1000 units per week.It charges $70 per unit,the average variable costs are $25,and the average costs are $65.In the long run,the firm should
A) Shut down since price is greater than average cost
B) Continue operating price is higher than average cost,its making a profit
C) Continue operating as the firm is covering all the variable costs and some of the fixed costs
D) Shut-down because it is cost effective to pay off the remaining fixed costs
Average Costs
The total cost of production divided by the number of goods produced, reflecting the average expense per unit.
Variable Costs
Expenses that change in proportion to the activity of a business, such as costs for raw materials or production.
Shut Down
The process of ceasing operations, typically referring to temporarily or permanently closing a business or facility.
- Apply the concept of marginal costs and average costs in determining production levels and profitability.
Verified Answer
TA
Tatiana Alessandra3 days ago
Final Answer :
B
Explanation :
CB) The firm should continue operating because the price per unit ($70) is higher than the average cost ($65), indicating that the firm is making a profit. This profit can be used to cover fixed costs and contribute to net earnings.C) Since the price per unit ($70) is also significantly higher than the average variable costs ($25), the firm is covering all its variable costs and some of its fixed costs. This situation suggests that the firm is in a position to at least break even on its variable costs, making it financially sensible to continue operations in the short run.
Learning Objectives
- Apply the concept of marginal costs and average costs in determining production levels and profitability.