A firm sells 1000 units per week.It charges $15 per unit,the average variable costs are $10,and the average costs are $25.In the short run,the firm should
A)Shut-down as the firm is making a loss of $10,000 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 $15 per unit,the average variable costs are $10,and the average costs are $25.In the short run,the firm should
A)​Shut-down as the firm is making a loss of $10,000 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 should continue operating in the short run as it is covering all its variable costs and some of the fixed costs. Even though the price is below the average cost, the firm can still make a contribution towards its fixed cost. Shutting down the firm would lead to a loss even greater than the current loss of $10,000 per week. Therefore, continuing to operate in the short run and focusing on long-term strategies to reduce costs and increase revenue would be a better option.

​A Firm Sells 1000 Units Per Week

A Firm Sells 1000 Units Per Week