The market price of the product produced by Jones Inc., is $6 per unit, which is higher than the average cost of $4 per unit at the profit maximizing output level.The average variable cost of production is $3.5 per unit.If demand for its product declines due to introduction of cheaper substitutes and the market price of the product falls to $3.8 per unit, which of the following statements will be true?

Question

Quizplus · Accepted Answer

At the new market price of $3.8, the firm will not be able to cover its average total cost of $4 per unit and will incur losses. However, the firm will continue production as long as the market price is above the average variable cost of $3.5 per unit. This is because even though the firm is not covering its fixed costs, it can still contribute towards the recovery of its fixed costs by continuing production. In the long run, the firm may need to adjust its production level or exit the market if it cannot cover its total costs.

The Market Price of the Product Produced by Jones Inc