Exhibit 8-3 Cost per unit curves

If the price of the firm's product in Exhibit 8-3 is $1.50 per unit, which intersects AVC at point B, the firm should:

Question

Exhibit 8-3 Cost per unit curves

If the price of the firm's product in Exhibit 8-3 is $1.50 per unit, which intersects AVC at point B, the firm should:

Quizplus · Accepted Answer

The firm should stay in operation for the time being even though it is making an economic loss because the price of $1.50 is above the minimum AVC of $1.25 at point B. While the firm is not making a profit, it is covering at least its variable costs and can try to make up for the loss in the long run. Shutting down temporarily would not make sense because it would still have to pay for its fixed costs and would not generate any revenue. Increasing the price may not be an option because it could decrease demand and lead to even lower revenues.

Exhibit 8-3 Cost Per Unit Curves