Question

In: Economics

Katie sells kickboards to people who like to exercise in swimming pools. Her firm, Katie’s Kickboard’s...

Katie sells kickboards to people who like to exercise in swimming pools. Her firm, Katie’s Kickboard’s operates in a perfectly competitive market. At the moment the price of kickboards is $7. Her average variable cost is $6 and her average total cost (unit cost) is $8. Is she making a per unit profit or loss? In the short run should she continue to produce, shutdown, or exit the market and never produce kickboards again?

Solutions

Expert Solution

P = 7

AVC = 6

AC = 8

Profit = (P - AC)Q

since P < AC which means firm is making loss but the decision of shutdown and continue the production depends on price and AVC

Here P > AVC implies that firm is making operating profit so firm will continue to produce output

Rahul Sunny answered 2 years ago
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