Final answer:
At an output quantity of 5 units, the WipeOut Ski Company experiences a loss of $5, with total revenue of $125 and total costs of $130. The average cost per unit exceeds the price, confirming the loss. Additionally, the marginal cost of the fifth unit is higher than the price, indicating that it is indeed contributing to the loss.
Step-by-step explanation:
To determine at which output quantity a business firm is losing money or experiencing a loss (negative profit), we examine total revenue, total costs, average cost, and marginal cost. In the case of the WipeOut Ski Company, the firm produces 5 units sold for $25 each.
Total revenue at this level is calculated as the quantity (5 units) multiplied by the price ($25/unit) giving us $125. However, the total cost of producing these 5 units is $130. Consequently, the company's profits or losses are represented by the difference between the total revenue and total costs, which in this case is a loss of $5.
If we look at the average cost, which is the total cost divided by the quantity produced, we find it to be $26/unit for 5 units. Since the selling price ($25/unit) is less than the average cost, the firm is making a loss on each unit sold, specifically a loss of $1 per unit (average cost $26/unit - price $25/unit). This indicates losses of a total of $5 when producing 5 units.
Finally, considering the marginal cost, which is the cost of producing one extra unit, we see it is $30/unit when producing the fifth unit. With a selling price of $25/unit, the marginal unit adds a $5 loss instead of contributing to profits. This implies that the firm should consider reducing the quantity produced to avoid increasing losses.