Consider the following data: equilibrium price = $12.50, quantity of output produced = 1,000 units, average total cost = $15, and average variable cost = $13. What will the firm do and why?

Question

Quizplus · Accepted Answer

The average variable cost is $13 per unit, which is higher than the equilibrium price of $12.50 per unit. This means that the firm is not covering all of its variable costs with the price it is receiving, and is incurring a loss. In the short run, the best option for the firm is to shut down and not produce any output, because it will continue to incur losses of $2,500 ($12.50 price - $15 average total cost) if it continues to produce. It is better to shut down and save on variable costs ($13 per unit * 1,000 units = $13,000) rather than continue producing and losing even more money.

Consider the Following Data: Equilibrium Price = $12