Question

T-Shirt Enterprises is selling in a purely competitive market. It is producing 3,000 units, selling them for $2 each. At this level of output, the average total cost is $2.50 and the average variable cost is $2.20. Based on these data, the firm should:____

A. shut down in the short run.
B. decrease output to 2,500 units.
C. ontinue to produce 3,000 units.
D. increase output to 3,500 units.

Answer 1

Shut down in the short run

Step-by-step explanation:

Looking at the contribution per unit of T shirt enterprises which is already at a deficit of -$0.5 , it is apparent that he can not generate enough fund to cover the cost of fixed expenses consumed in the course of the production not to talk of making profit.

Therefore if it continues in this way he will surely shut down in the shot run as a result of the highly competitive nature of the market .

Working

Contribution per unit - selling price - variable cost

$2- $2.5 = -$0.5

Answer 2

A. Shut down in the short run

Step-by-step explanation:

If the company's sells a products that cost an average variable cost of $2.20 dollars for $2 each, then the company should shut down in the short run and reaccess or rather re-evaluate things. If the company's selling price was higher than the average variable cost but lower than the average total cost, the company would be advised to keep producing but with decrease in the level of output. However, the case here is that both the AVC and ATC of producing one product is higher than the selling price of one product, thus, the company should shut down operations in the short run.