Question

Chris Farley's Frozen Yogurt is a purely competitive firm that makes frozen yogurt cakes. The market price is currently $7 per cake. Assume that AVC is $6 per cake, AFC is $4 per cake, and Farley's sells 200 frozen yogurt cakes. 1) (Select All that Apply)  will incur a short-run loss.  will earn an economic profit.  should produce in the short run.  should shut down.  will earn a normal profit.

Answer 1

Answer: • should produce in the short run

• The firm incur a shirt run loss.

Step-by-step explanation:

Market price = $7

AVC = $6 per cake

AFC = $4 per cake

Amount of goods sold = 200

Since the average variable cost of $6 is less than the price of $7, the firm can continue production and shouldn't shut down.

The total revenue will be calculated as:

= P × Q

= $7 × 200

= $1400

Total cost will then be calculated as:

= (AFC+AVC) × Q

= ($4 + $6) × 200

= $10 × 200

= $2000

Since total cost is more than the total revenue, a loss is incurred which will be:

Loss = Total cost - Total revenue

= $2000 - $1400

= $600

It means that:

• should produce in the short run

• The firm incur a shirt run loss.