Question

Suppose that the demand for my new book, Spatulas From Around the World, is such that the demand curve lies everywhere below the average variable cost of producing it. To maximize profits or minimize losses, I should:_______.a. raise price.
b. lower price to increase demand.
c. shut down the presses printing her book.
d. lower price until demand is inelastic.
e. charge the highest price she can.

Answer 1

Answer:

C. Shut down the presses printing my book

Explanation:

Since the average variable cost of producing the book is above the demand curve, the best course of action is to shut down the printing (production) of more books. The author would lose less money by shutting down operations rather than continuing production at a variable cost higher than the demand he's receiving for the books.

In economics, when profit is less than the average variable cost, firms are advised to stop production in the short run and incur economic loss on fixed inputs. This is because with continued operations, total revenue would not only be lower than total cost, but rather, would also be less than total variable cost.