Final answer:
The firm's AVC would increase from $3 to $4 per unit when the output per labor decreases from 20 units to 15 units, because the same labor cost of $60 is now divided by fewer units produced.
Step-by-step explanation:
To determine the firm's average variable cost (AVC) after the output per labor decreases from 20 units to 15 units, we must first understand what AVC represents. It is the cost a firm incurs for variable inputs divided by the quantity of output produced. In this case, if the price of labor is $60 and the output per labor is initially 20 units, then the AVC would be calculated by dividing the cost of labor by the number of units produced per labor. This results in an AVC of $3 per unit ($60/20 units).
However, if the output per labor decreases to 15 units, the AVC will increase because the same amount of labor cost is now spread over fewer units. The new AVC is calculated by dividing the price of labor by the new output per labor, which is $60/15 units, leading to an AVC of $4 per unit.
In a perfectly competitive market, if the price of the product is greater than the AVC, the firm should continue producing. For example, if the price was $28 and initially the AVC was $16.40 for producing 5 units, the firm would keep producing since the price is greater than the AVC. In the scenario with a decreased output per labor, if this logic were applied, as long as the price exceeds $4 per unit, it remains beneficial for the firm to continue producing.