Chapter P3, Problem 1KC

To determine

 The short run advice to the firm.

Answer to Problem 1KC

Option 'c' is correct.

Explanation of Solution

The firms produce the goods and services that are demanded by the people in the economy. The production takes place after making use of the factors of production and that means there will be factor costs to the firm while making production. The costs such as the cost of the raw materials, rent of land, interest on capital, as well as the wage of labor, are the costs of the firm. The additional output due to an additional input of production is known as the marginal product of the input. The profit is the excess revenue made by the firm after deducting the total cost from the total revenue of the firm. When the total cost is higher than the total revenue, there will be an economic loss to the firm. When the revenue of the firm is not even able to cover the average variable cost of production, the firm should shut down its production to avoid further loss to the firm.

Option (c):

It is given that the average fixed cost of the firm is $6 and the average variable cost is $25. When the price of the product is fixed at $24 where MR is equal to MC, the revenue is not even able to cover the AVC of the firm and carrying on further production will increase the loss above the fixed cost and thus, the firm should shut down. This means that option 'c' is correct.

Option (a):

When the firm increases the output, the point where MR is equal to MC, MC will start to increase further which will increase the loss of the firm and that means the loss of the firm will further increase. Hence, option 'a' is incorrect.

Option (b):

The decreasing of output makes the firm to get lower revenue and since the average variable cost is higher, the firm should shut down its operations and not decrease the level of output. It means option 'b' is also incorrect.

Option (d):

When the firm stays at the current output level, the total cost to the firm is $6200, whereas the revenue is $4800 which means that the firm is losing $1,400 and not earning a profit of $1,400. Hence, option 'd' is incorrect.

Option (d):

When the firm stays at the current output level, the total cost to the firm is $6200, whereas the revenue is $4800 which means that the firm is losing $1,400 and if the firm shutdowns its production, it makes the loss only equal to the fixed cost and thus, the firm should shut down its operations. This means that option 'd' is incorrect.

Economics Concept Introduction

Profit:  The profit is the excess revenue made by the firm through the sale of goods and services after deducting the total cost from the total revenue.