Question

A firm's optimal output is 1,000 units per month, with a fixed cost of $300 per month and variable cost of $200 per month. The market price of this good is $0.40. The firm decides to shut down. In such a situation, this firm should ________.

Answer 1

Answer:

Increase the production to decrease the fixed cost per unit

Explanation:

The reason is that if the production increases then the fixed cost will start decrease because the level of production and fixed cost per unit are inversely proportional to each other. Now if the production increases to 1250 ($500/0.4) units then the firm is at no profit and no loss position (Breakeven position). So all the firm has to do is increase its production above 1250 and generate the demand of increased production at the same price.