Question

A firm has hired you as a consultant. This firm is perfectly competitive and has no control over price. This firm is selling 10,000 units at a price of $2. Total costs are $30,000. Total variable costs are $25,000. They can produce another unit at a cost of about $2. What do you recommend?

Answer 1

As a consultant, I would recommend the firm to not produce at the given price.

Step-by-step explanation:

The price level is given at $2.

The firm is producing 10,000 units at this price level.

The total cost of production is $30,000.

The total variable cost is $25,000.

Another unit can be produced at a cost of $2. This means that the marginal cost is $2.

The average variable cost will be

=total variable cost/number of output

=$25,000/10,000

=$2.5

Here, the price level is not able to cover the average variable cost. The firm will be incurring losses. It should produce zero output at this price level.