Asked by shrey patel on Sep 24, 2024
Verified
A shoe manufacturer is producing at a point where its marginal costs are $5 and its fixed costs are $5000.At the current price of $10 it is producing 500 pairs.If the demand goes down,such that they can now only charge $8 per pair,should they continue production in the short run?
A) No because price has fallen
B) Yes because price is still higher than marginal costs
C) No because price is lower than average cost
D) Yes because price is higher than marginal costs
Marginal Costs
The additional cost incurred from producing one more unit of a product or service.
Fixed Costs
Expenses that do not fluctuate with changes in production level or sales volume, such as rent or salaries.
Short Run
A period in economic analysis during which some factors of production are fixed, affecting production and cost decisions.
- Discern the specific conditions that lead a firm to consider pausing or terminating its operations over short and extended periods.
- Analyze and illustrate the importance of average variable costs, average costs, and price in the shutdown decision-making context.
Verified Answer
YY
Yeeeteed Yoonminabout 20 hours ago
Final Answer :
B
Explanation :
As long as the price ($8) is still higher than the marginal cost ($5), the shoe manufacturer should continue production in the short run to cover the variable costs and make a profit towards the fixed costs. Therefore, the best choice is B.
Learning Objectives
- Discern the specific conditions that lead a firm to consider pausing or terminating its operations over short and extended periods.
- Analyze and illustrate the importance of average variable costs, average costs, and price in the shutdown decision-making context.