Question

In: Economics

At a quantity of 375 units marginal revenue equals marginal cost. Fixed cost is $1000, the Total Variable Cost is $7,000 and the Total Revenue is $6000.

At a quantity of 375 units marginal revenue equals marginal cost. Fixed cost is $1000, the Total Variable Cost is $7,000 and the Total Revenue is $6000. Calculate the average fixed cost, average variable cost, average total cost and marginal revenue. Should the company shut down or stay in business?

Expert Solution

At a quantity of 375 units marginal revenue equals marginal cost.

Fixed cost is $1000, the Total Variable Cost is $7,000 and the Total Revenue is $6000.

AFC=1000/375

=$2.66

AVC=7000/375

=$18.66

P=AR=MR=TR/Q

=6000/375

=$16

Since Q=375 units,

AVC=$18.66

Shut-down condition is

P=MC=minimum of AVC

Since at this quantity total revenue is $6000 and total variable cost is $7,000, so it means firm is not able to cover even variable cost, so firm should shut-down and reduce loss in short-run as well as in the long-run.

Fixed cost does not vary with the change in the output.

VC=TC-FC

ATC=TC/Q

AVC=TVC/Q

MC=TCn-TCn-1

TC=TFC+TVC

ATC=TC/Q

AVC=TC/Q

AFC=TFC/Q

The profit-maximizing condition is

MR=MC

Rahul Sunny answered 2 years ago

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