Question

A catering company is producing at a point where its marginal costs are $25 and its fixed costs are $5000. At the current price of $10 it is producing 50 meals. If the demand goes up, such that they can now charge $20 per meal, how much should the firm now produce

Answer 1

The firm should shut down the production.

Step-by-step explanation:

The given marginal costs = $25

Fixed cost of the production = $5000

The price of producing the 50 units of meals = $10

The new price of the meal when demand goes up = $20

Since it can be seen that the price of the meal is lower than the average cost or even it is less than the marginal cost. So, when the prices are lower than average cost then a firm should shut down the production because after shutting down the production the loss will be equal to the fixed cost only.

So, the firm should shut down the production.