Question

Suppose a firm can sell its product for a price of $75 (no more, no less). Suppose that the marginal cost curve and average variable cost curves cross at $100 and a quantity of 10. Assume that fixed costs are $0. At a quantity of 10, total revenue would be: 750

At a quantity of 10, variable cost would be: ________ 0 or 1,000

Since fixed costs are $0, profit at 10 units of output would therefore be: ________ -250, 0 ,750

However, if the firm chose to produce nothing, total revenue would instead be: _________ 0, 750, 75

and variable cost would be: _______ 250, -750, 0

Therefore if the firm produces nothing profit would be -250 .

The BEST course of action for this firm would be to produce: ________Nothing because P < AVC or Produce 10 units of Output

Answer 1

Average variable cost is $100.

Quantity= 10

AVC= Total variable cost/ quantity.

Total variable cost = AVC x Quantity= $100 x 10 = $1,000.

Profits at 10 units will be $-250. Total revenue= $750, variable cost is $1000, so loss is $1000 - $750= $250 (loss).

if a firm chooses to produce nothing, total revenue= 0. Total revenue= Price x quantity. Quantity= 0, so total revenue = $0. Variable costs will be 0 as variable costs are costs that vary with output like labor, material.

If the firm produces nothing, then profits would be zero.

The shutdown point is minimum AVC, where MC= AVC which is $100. P is $75. P < minimum AVC, so it is better for the firm to shutdown.