Final answer:
The cost of producing one additional unit for $70 is called the marginal cost. The firm experiences a loss because the total revenue from selling five units at $25 each is less than the total cost of producing them. This situation suggests the firm should consider reducing production to minimize losses.
Step-by-step explanation:
The cost of one additional unit that the firm can produce for $70 is known as the marginal cost. In the context of this scenario, total revenues when producing five units is calculated by multiplying the quantity (five units) by the price per unit ($25), resulting in $125. However, total costs for producing these five units will be $130, which includes the initial total cost for four units ($100) plus the marginal cost of the fifth unit ($30, which is the sum of the additional unit's cost of $70 and the previous total cost of $100). This leads to the firm experiencing a loss or negative profits of $5 when five units are produced and sold at $25 per unit.
If the price per unit is less than the average cost per unit, the firm does not make a profit. With an average cost of $26 per unit for five units and a selling price of $25 per unit, each unit sold results in a loss of $1, cumulatively leading to a total loss of $5. Furthermore, with marginal costs being higher than the selling price, the last unit is contributing to the losses prompting the recommendation that the firm should decrease its production to avoid increasing losses.