Question

at lunchtime, pete's chilly dogs sells hot dogs, chips, and soft drinks from five portable hot dog carts stationed on busy street corners. the depreciation cost on the carts is $1,000 per year for each cart. the company buys supplies (hot dogs, chips, cups, napkins) as needed. the 5 cart operators are each paid $8,000 per year plus 5% of sales revenue. relative to the number of customers at a particular hot dog stand, the depreciation cost ismultiple choicevariable.incorrectmixed.fixed.strategic.

Answer 1

If the price is above average variable cost, a firm may continue to operate at a loss to cover some fixed costs; however, if the price falls below average variable cost, shutting down to minimize losses becomes the preferable option. The correct answer is a.

When discussing the shutdown point or whether to continue operating at a loss, it's vital to consider if the price is above or below the average variable cost (AVC). If the price covers the AVC, it makes sense to keep operating to cover at least part of the fixed costs, as illustrated in Figure 8.6 (a). In this scenario, the farm continues to operate despite losses because the price of $2.00 per pack is above the average variable cost, allowing it to cover variable costs and contribute towards fixed costs.

Conversely, if the price falls below the AVC, continuing operations would not only fail to cover variable costs but would also increase overall losses, as shown in Figure 8.6 (b). For instance, at a price of $1.50 per pack, the revenue does not cover variable costs or contribute to fixed costs, and the losses of operating ($75) exceed the fixed costs ($62). Therefore, the loss minimizing choice is to shut down to avoid further losses.

The correct answer is a.