Refer to the accompanying graph. If this firm is a price taker and the price of each unit of output is $15, then this firm should:
A)produce 60 units of output.
B)shut down in the short run.
C)raise its price to increase its revenue.
D)lower its output to decrease its marginal cost.

Question

Refer to the accompanying graph. If this firm is a price taker and the price of each unit of output is $15, then this firm should: 
A)produce 60 units of output. 
B)shut down in the short run. 
C)raise its price to increase its revenue. 
D)lower its output to decrease its marginal cost.

Quizplus · Accepted Answer

The firm should continue to operate in the short run because it earns enough revenue ($900)to cover its variable cost ($720 = AVC × Q = $12 × 60). Its fixed cost of $240 [FC = TC − VC = (ATC − AVC)× Q = $4 × 60 = $240] must be paid regardless, so it is better to lose $60 by operating than to lose $240 by shutting down.

Refer to the Accompanying Graph