Consider the choices facing an unprofitable (and perfectly competitive) firm. Th
ID: 1173438 • Letter: C
Question
Consider the choices facing an unprofitable (and perfectly competitive) firm. The firm currently produces 100 units per day and sells them at a price of $22 each. At the current output quantity, the firm's total cost is $3,000 per day, its variable cost is $2,500 per day, and its marginal cost is $45. Evaluate the following statement from the firm's accountant: "Given our current production level, our variable cost ($2,500) exceeds our total revenue ($2,200). We should shut down our production facility."
Explanation / Answer
Q = 100 units per day, P= $ 22/unit,
TC = $ 3000 per day, VC = $ 2500 / day
MC = $ 45
AVC = VC /Q = $2500/100 = $ 25
As we can see the Variable cost is -$2500 per day and
Total revenue = PQ = $22 * 100 = $ 2200
Variable cost is greater than Total Revenue.
Since, the variable cost is greater than total revenue thus in the short run the firm will make loss. Further it will be unable in recover even Fixed cost.
Firm must shutdown their production facility.