UG Tech Inc.is a perfectly competitive firm producing wireless mouses where marginal revenue is equal to marginal cost.The current market price of wireless mouse is $30.00.UG Tech Inc.sells 500 wireless mouses.Its short run average variable cost is $10.00 and its average fixed cost is $5.00.What should UG Tech Inc.do?

Question

Quizplus · Accepted Answer

UG Tech Inc. should continue to produce because the market price of wireless mouse is higher than its short run average variable cost. In other words, the company is earning a profit in the short run. Even though the price is not higher than the average total cost (which includes both fixed and variable costs), the company can still cover its variable costs and some of its fixed costs by continuing to produce. Shutting down would lead to a loss of revenue and would not be the best choice in this scenario. Decreasing production would not necessarily lead to a decrease in short run average variable cost, and increasing production may not necessarily decrease average fixed cost.