Question

Consider the following data: equilibrium price = $10, quantity of output produced = 100 units, average total cost = $13, and average variable cost = $7. What will the firm do and why? Group of answer choices Shut down in the short run, because it is taking a loss of $200.

Answer 1

Answer: The Firm should Continue to Operate

Explanation:

A firm should continue to operate in the market if a Firms generates enough total revenue to at least cover its total variable costs. This is known as the shut down rule, when a firm's total revenue is less than total variable costs or Selling Price is less than the Average Variable costs per unit the firm must shut down is firm is operating at a loss and producing more units will only increase losses.

Price = $10

output = 100

average total costs = 13

average variable costs = $7

Total Revenue = $10 x 100 = $1000

Total costs = $13 x 100 = $1300

The firm's Price of $10 is greater than average variable costs of $7. The firm is taking a loss of $300 (1000 - 1300). The firm should continue to operate, even though the firm is taking a loss of $300.  The firm's revenue is enough to cover variable costs.

The firm will only shut down in the short run if the Price is less the average Variable costs and in this case the price is higher than Average variable costs so the firm should definitely continue to operate