Question

Should a firm shut down if its weekly revenue is ​$1 comma 000​, its variable cost is ​$600​, and its fixed cost is ​$800​, of which ​$350 is avoidable if it shuts​ down? ​ Why? The firm should A. produce because revenue of ​$1 comma 000 is greater than avoidable costs. B. produce because revenue of ​$1 comma 000 is greater than variable costs. C. produce because revenue of ​$1 comma 000 is greater than fixed costs. D. shut down because because variable costs are less than fixed costs. E. produce because revenue is positive.

Answer 1

Answer: The correct answer is "C. produce because revenue of ​$1 comma 000 is greater than fixed costs.".

Explanation: The firm should produce because the revenue of 1000 is enough to cover the fixed costs and part of the variables (1000 - 800 - 600 = (-400)) so that the loss is less than if it stopped producing despite the avoidable costs (800 - 350 = 450) since if it stopped producing it would have a loss of $ 450 and producing it would have a loss of $ 400.