A firm sets its price at $10.00 per unit.It has an average variable cost of $8.00 and an average fixed cost of $4.00 per unit.In the short run,this firm is
A)incurring a loss of $2.00 per unit and should shut down.
B)unable to cover all of its fixed cost and hence should shut down.
C)incurring a profit.
D)incurring a loss per unit of $2.00,but since it can still cover its variable costs,should continue to operate

Question

​A firm sets its price at $10.00 per unit.It has an average variable cost of $8.00 and an average fixed cost of $4.00 per unit.In the short run,this firm is
A)​incurring a loss of $2.00 per unit and should shut down.
B)unable to cover all of its fixed cost and hence should shut down.
C)incurring a profit.
D)​incurring a loss per unit of $2.00,but since it can still cover its variable costs,should continue to operate

Quizplus · Accepted Answer

The average total cost per unit for this firm is $12.00 ($8.00 variable cost + $4.00 fixed cost). Since the firm is only receiving $10.00 per unit, it is incurring a loss of $2.00 per unit. However, the firm should continue to operate in the short run as it can still cover its variable costs of $8.00 per unit. Shutting down would result in a loss of $4.00 per unit ($8.00 variable cost + $4.00 fixed cost) without any revenue to offset it. Therefore, the best choice is D.

​A Firm Sets Its Price at $10

A Firm Sets Its Price at $10