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When price is less than average variable cost at the profit-maximising level of output, a firm should :
- a)produce where marginal revenue equals marginal cost if it is operating in the short run.
- b)produce where marginal revenue equals marginal cost if it is operating is the long run.
- c)shutdown, since it will lose nothing in that case.
- d)shutdown, since it cannot even cover its variable costs if it stays in business.
Correct answer is option 'D'. Can you explain this answer?
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When price is less than average variable cost at the profit-maximising...
Understanding Price and Average Variable Cost
When a firm's price falls below its average variable cost (AVC) at the profit-maximizing level of output, it indicates a significant financial concern.
Implications of Price Below AVC
- If the price is less than AVC, the firm is unable to cover its variable costs.
- Continuing production would lead to greater losses since fixed costs will still be incurred without sufficient revenue to cover even the variable expenses.
Short-Run Decision Making
- In the short run, firms should make decisions based on variable costs, as fixed costs are sunk and cannot be recovered.
- If the price is below AVC, the firm should minimize losses by shutting down operations.
Reasons for Shutdown
- **Loss Minimization**: By shutting down, the firm avoids incurring additional losses that would occur if it continued to produce at a loss.
- **No Contribution to Fixed Costs**: Operating at a loss means that the firm is contributing nothing toward fixed costs, which further exacerbates financial difficulties.
Conclusion
In this scenario, option 'D' is correct: the firm should shutdown, since it cannot even cover its variable costs if it stays in business. By ceasing operations temporarily, the firm can prevent further losses and reassess its position for future market conditions.
When a firm's price falls below its average variable cost (AVC) at the profit-maximizing level of output, it indicates a significant financial concern.
Implications of Price Below AVC
- If the price is less than AVC, the firm is unable to cover its variable costs.
- Continuing production would lead to greater losses since fixed costs will still be incurred without sufficient revenue to cover even the variable expenses.
Short-Run Decision Making
- In the short run, firms should make decisions based on variable costs, as fixed costs are sunk and cannot be recovered.
- If the price is below AVC, the firm should minimize losses by shutting down operations.
Reasons for Shutdown
- **Loss Minimization**: By shutting down, the firm avoids incurring additional losses that would occur if it continued to produce at a loss.
- **No Contribution to Fixed Costs**: Operating at a loss means that the firm is contributing nothing toward fixed costs, which further exacerbates financial difficulties.
Conclusion
In this scenario, option 'D' is correct: the firm should shutdown, since it cannot even cover its variable costs if it stays in business. By ceasing operations temporarily, the firm can prevent further losses and reassess its position for future market conditions.
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When price is less than average variable cost at the profit-maximising level of output, a firm should :a)produce where marginal revenue equals marginal cost if it is operating in the short run.b)produce where marginal revenue equals marginal cost if it is operating is the long run.c)shutdown, since it will lose nothing in that case.d)shutdown, since it cannot even cover its variable costs if it stays in business.Correct answer is option 'D'. Can you explain this answer?
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When price is less than average variable cost at the profit-maximising level of output, a firm should :a)produce where marginal revenue equals marginal cost if it is operating in the short run.b)produce where marginal revenue equals marginal cost if it is operating is the long run.c)shutdown, since it will lose nothing in that case.d)shutdown, since it cannot even cover its variable costs if it stays in business.Correct answer is option 'D'. Can you explain this answer? for CA Foundation 2024 is part of CA Foundation preparation. The Question and answers have been prepared according to the CA Foundation exam syllabus. Information about When price is less than average variable cost at the profit-maximising level of output, a firm should :a)produce where marginal revenue equals marginal cost if it is operating in the short run.b)produce where marginal revenue equals marginal cost if it is operating is the long run.c)shutdown, since it will lose nothing in that case.d)shutdown, since it cannot even cover its variable costs if it stays in business.Correct answer is option 'D'. Can you explain this answer? covers all topics & solutions for CA Foundation 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for When price is less than average variable cost at the profit-maximising level of output, a firm should :a)produce where marginal revenue equals marginal cost if it is operating in the short run.b)produce where marginal revenue equals marginal cost if it is operating is the long run.c)shutdown, since it will lose nothing in that case.d)shutdown, since it cannot even cover its variable costs if it stays in business.Correct answer is option 'D'. Can you explain this answer?.
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