Answer: Shutdown, $150 and $1500
Explanation:
The short run decision facing a firm is the average fixed cost, price and average variable cost. If the price ($8) falls below AVC ($10), then shutting down production is the best decision in the short run. Since the firm is producing variable cost is lower than price and can't even cover fixed costs.
ATC=AFC+AVC
11=AFC+10
11-10=AFC
AFC= $1
AFC=TFC/OUTPUT
1=TFC/150
TFC=$150
AVC=TVC/OUTPUT
10=TVC/150
TVC=150 x 10
TVC= $1500
Answer:
The best policy for this firm is to shut down in the short run. Also, total fixed cost equals $150 and total variable cost equals $1,500 for this firm.
Explanation:
In the short run, policy for a firm is to shut down operation if the price lower than the average variable cost (AVC). This is because, the lower price is too low to cover or pay for variable cost and the firm will continue to run at a loss if it continues to produce or operate.
The total fixed cost and total variable cost can be calculated as follows:
Average fixed cost (AFC) = Average Total Cost (ATC) – Average variable cost (AVC) = 11 – 10 = $1
Total fixed cost (TFC) = AFC × Unit of output = 1 × 150 = $150
Total variable cost (TVC) = AVC × Unit of output = $10 × 150 = $1,500
Therefore, the best policy for this firm is to shut down in the short run. Also, total fixed cost equals $150 and total variable cost equals $1,500 for this firm.
