Assume a firm has the following cost and revenue characteristics at its current level of output: price=$10.00,average variable cost=$8.00 and average fixed cost =$4.00.This firm is
A)incurring a loss of $2.00 per unit and should shut down.
B)realizing only a normal profit.
C)realizing an economic profit of $2.00 per unit.
D)incurring a loss per unit of $2.00,but should continue to operate in the short run.

Question

Quizplus · Accepted Answer

The firm's total cost per unit can be calculated by adding the average variable cost and the average fixed cost, which is $8.00 + $4.00 = $12.00. Since the price is only $10.00 per unit, the firm is incurring a loss of $2.00 per unit. However, since the fixed costs are sunk costs in the short run, the firm should continue to operate and produce as long as it can cover its variable costs. Therefore, the best choice is D.

Assume a Firm Has the Following Cost and Revenue Characteristics