Price falls to $32. Marginal cost equals $32 at four units, where total cost is $188 and average variable cost is $32. What should the firm do?

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Question

Price falls to $32. Marginal cost equals $32 at four units, where total cost is $188 and average variable cost is $32. What should the firm do?

Accepted Answer

It is exactly at the shutdown point — producing or closing both give a $60 loss — Award 1 mark. Working: revenue is 4 × $32 = $128 against total cost of $188, a $60 loss equal to fixed costs. Price covers average variable cost precisely and nothing more.

Answer

It is exactly at the shutdown point — producing or closing both give a $60 loss

Answer

It should shut down immediately to avoid a larger loss

Answer

It should raise output to six units to spread fixed costs

Answer

It should continue producing, since it will reduce its loss below $60

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