Exhibit 12-5 Refer to Exhibit 12-5.In the short run,if the market price falls to $40 per unit,the firm should:

Question

Exhibit 12-5  Refer to Exhibit 12-5.In the short run,if the market price falls to $40 per unit,the firm should:

Quizplus · Accepted Answer

In the short run, the firm should continue to operate temporarily if it is able to cover its variable costs. In this case, the variable cost per unit is $30, and if the market price falls to $40 per unit, the firm will still be able to earn a contribution to fixed costs of $10 per unit (($40 - $30) = $10). This contribution will help minimize the losses that the firm incurs in the short run, even if it is not earning an economic profit. Therefore, the best choice is to continue operating temporarily to minimize losses.