When Acme Dynamite produces 250 units of output, its variable cost is $2,000, and its fixed cost is $500. It sells each unit of output for $25. If the price of dynamite drops to $10, should Acme Dynamite continue to operate in the short run?
A)No, because price is less than average total cost.
B)Yes, because price is less than average variable cost.
C)No, because price is not greater than average total cost.
D)Yes, because price is greater than average variable cost.

Question

Quizplus · Accepted Answer

A firm should continue to produce as long as price is greater than the minimum of average variable cost. The average variable cost of producing 250 units is $8 (= $2,000/250), so we know the minimum of average variable cost is no greater than $8, and that the firm should continue to operate if price drops to $10.

When Acme Dynamite Produces 250 Units of Output, Its Variable