Question

A firm sets its price at $10.00 per unit. It has an average variable cost of $8.00 and an average fixed cost of $4.00 per unit. In the short run, this firm is a. ​incurring a profit. b. ​incurring a loss of $2.00 per unit and should shut down. c. ​incurring a loss per unit of $2.00, but since it can still cover its variable costs, should continue to operate d. ​unable to cover all of its fixed cost and hence should shut down.

Answer 1

Answer:

c. ​incurring a loss per unit of $2.00, but since it can still cover its variable costs, should continue to operate.

Explanation:

Profit and loss analysis is done by a business to see the viability of producing a product, considering the revenue and cost incurred.

The revenue of the company is price of the product less fixed cost and variable cost. That is 10-8-4= -$2.

The company is making a loss of $2 per product sold.

However considering only variable cost revenue is 10-8= $2. That is a $2 profit.

The company should keep producing because the revenue it makes on variable cost will account for the fixed cost (does not change) with increased production.

For example if the company produces 5 units the profit is (10*5)-(8*5)-4= $6