Asked by Breana Gordon on Jun 26, 2024
Verified
A firm sells 300,000 units per week.It charges $ 35 per unit,the average variable costs are $40,and the average costs are $55.In the long run,the firm should
A) Shut-down as the firm is making a loss of $15 million per week
B) Shut-down as the firm cannot cover the variable costs
C) Shut down because the price is lower than average cost
D) None of the above
Average Variable Costs
The total variable costs (costs that vary with the level of output) divided by the quantity of output produced.
Average Costs
The total cost of production divided by the number of goods produced, representing the per-unit cost of production.
Shut-Down
Shut-down refers to the temporary or permanent cessation of operations, usually in the context of businesses or machinery.
- Understand when it becomes imperative for a firm to consider a hiatus or complete cessation of operations in the short and long term.
- Recognize and elucidate the criticality of average variable costs, average costs, and price in the determination of when to cease operations.
Verified Answer
KP
Kanika PareekJun 29, 2024
Final Answer :
C
Explanation :
Since the price of $35 per unit is lower than the average cost of $55 per unit, the firm is making a loss of $20 per unit. Therefore, the firm should shut down in the long run.
Learning Objectives
- Understand when it becomes imperative for a firm to consider a hiatus or complete cessation of operations in the short and long term.
- Recognize and elucidate the criticality of average variable costs, average costs, and price in the determination of when to cease operations.