Asked by Brittany Shackelford on Jun 30, 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 short run,the firm should
A) Shut-down as the firm is making a loss of $15,000 per week
B) Shut-down as price is lower than average cost
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
Variable Costs
Costs that vary directly with the level of production or sales volume.
Average Costs
The total costs (fixed and variable) of production divided by the total quantity of output, indicating the cost of producing each unit.
Fixed Costs
Costs that do not vary with the level of output or sales, such as rent, salaries, and loan payments.
- Acquire knowledge of decision-making strategies for immediate and future operational and investment needs.
- Utilize marginal and average cost concepts to decide on production quantities and profitability.
Verified Answer
ZK
Zybrea KnightJul 04, 2024
Final Answer :
C
Explanation :
The firm is still covering variable costs and contributing to covering some of the fixed costs. Therefore, in the short run, it is better to continue operating rather than shutting down. Despite the fact that the firm is not making a profit (as the price is equal to the average cost), it is still covering some costs, which is preferable to bearing the total fixed costs without any revenue.
Learning Objectives
- Acquire knowledge of decision-making strategies for immediate and future operational and investment needs.
- Utilize marginal and average cost concepts to decide on production quantities and profitability.