Consider a firm that produces 500,000 units per year.The firm's fixed costs are $100,000,marginal costs are $250 and the price per unit is $400.In the long-run,how low can price go before it is profitable to shut down?

Question

Quizplus · Accepted Answer

To determine the level of shutdown price, we need to calculate the firm's average variable cost (AVC), which is calculated by dividing the total variable costs by the quantity of output. 
AVC = Total Variable Cost / Quantity of Output 
Total Variable Cost = Marginal Cost * Quantity of Output 
Total Variable Cost = $250 * 500,000 = $125,000,000 
AVC = $125,000,000 / 500,000 = $250 
The shutdown price is equal to the minimum average variable cost. Therefore, if the price falls below $250.20, the firm should shut down in the long-run because it wouldn't be covering its variable costs. Thus, the best choice is C.

Consider a Firm That Produces 500,000 Units Per Year