A firm has paid its overhead costs for the year, a fixed cost which does not...

A firm has paid its overhead costs for the year, a fixed cost which does not vary with output in the short run. The price for its product is less than its minimum average variable cost. If it seeks to maximize its profits, in the short run it will: 1. produce some output and incur an economic loss 2. produce no output and incur an economic loss 3. produce some output and earn an economic profit 4. produce no output and earn an economic profit

Expert Solution

Answer - 2. produce no output and incur an economic loss

In the given situation, there will be be some fixed cost and the price or AR is less than the Average Variable Cost (AVC). As we know in the short run, the fixed cost remains constant. In this given situation, the price is less than AVC. It implies that the firm is not able to recover all the variable cost with the total revenue generated. The firm now should shut down and incur the loss that is equal to the total fixed cost.

If the firm does not shuts down, then the loss will be some part of the variable cost (not recovered) and the total fixed cost. If the shuts down, then only the total fixed cost will be the loss. Hence, its wise to shut down and suffer a loss that is equal to total fixed cost.

Therefore, in the above situation, the firm should shut down and incur economic loss.

Rahul Sunny answered 3 years ago

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A firm has paid its overhead costs for the year, a fixed cost which does not...

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