FIGURE 8-8

-Refer to Figure 8-8. If the market price falls to $40 per unit, what action should the firm take?

Question

FIGURE 8-8
 
-Refer to Figure 8-8. If the market price falls to $40 per unit, what action should the firm take?

Quizplus · Accepted Answer

At a market price of $40 per unit, the firm should continue to operate temporarily if this price covers its variable costs, even if it does not cover the total costs including fixed costs. This is because, by continuing to operate, the firm minimizes its losses to less than the fixed costs, which it would have to bear even if it shut down. Shutting down would only make sense if the price were below the variable costs, leading to larger losses if operations continued.

FIGURE 8-8 -Refer to Figure 8-8. If the Market Price Falls to Market