Final answer:
The student's question involves business accounting practices specifically related to inventory valuation adjustments known as write downs and write ups, which reflect decreases or increases in market values of assets respectively. Examples from different business scenarios illustrate how pricing affects profitability and the decision-making process.
Step-by-step explanation:
The student's question deals with the concept of write down and write up in the context of inventory valuation in business accounting. If you buy 10 cups at £5 each and the value goes down to £4, you would record a write down, which is an accounting action that reduces the book value of the inventory due to a decrease in market value. Conversely, when the value of the cups increases to £7, you would record a write up, which increases the book value of the inventory to reflect the higher market value. Examples from micro-level business scenarios, such as the t-shirt company 'Coolshirts' selling t-shirts at a specific price, or the 'WipeOut Ski Company' producing and selling units at another price, help to demonstrate profitability and the impacts of pricing on business decisions.
To determine whether a company is making a profit or loss at a certain price, one can look at average costs and compare them to the selling price. If the selling price is above the average cost, the company is generally making a profit. However, if the price falls below the minimum average variable cost, as in the example where the firm must shut down if the price falls below $1.72, the company is incurring losses and may need to cease operations.