A firm sells 1000 units per week.It charges $70 per unit,the average variable costs are $25,and the average costs are $65.In the short run,the firm should
A)Shut-down as the firm is making a loss of $15,000 per week
B)Shut-down as price is lower than average cost
C)Continue operating as the firm is covering all the variable costs and some of the fixed costs
D)Shut-down because it is cost effective to pay off the remaining fixed costs

Question

​A firm sells 1000 units per week.It charges $70 per unit,the average variable costs are $25,and the average costs are $65.In the short run,the firm should
A)​Shut-down as the firm is making a loss of $15,000 per week
B)Shut-down as price is lower than average cost
C)Continue operating as the firm is covering all the variable costs and some of the fixed costs
D)​Shut-down because it is cost effective to pay off the remaining fixed costs

Quizplus · Accepted Answer

The firm is still covering variable costs and contributing to covering some of the fixed costs. Therefore, in the short run, it is better to continue operating rather than shutting down. Despite the fact that the firm is not making a profit (as the price is equal to the average cost), it is still covering some costs, which is preferable to bearing the total fixed costs without any revenue.

​A Firm Sells 1000 Units Per Week

A Firm Sells 1000 Units Per Week