Question

A profit maximizing firm in a competitive market currently produces and sells 9,200 units of output at a price of $2.75 per unit. The firm’s total fixed cost is $1840 and its total variable cost is $23,920. What should this firm do in the short run? Show and Explain.

Answer 1

Sol :

In a Profit maximising firm of a perfectly competitive market . Firm is producing 9200 units of output at $ 2.75 per unit.

Total fixed cost = $1840

Total variable cost = $ 23920

Total cost = Total Fixed cost + Total Variable cost

= $1840 + $23920

=$25760

Total Revenue = Price x Quantity

=$ 2.75 × 9200

= $ 25300

Loss = $25300 - $25760 = (-$460)

As, firm is able to cover total variable cost only not the fixed cost .

So, firm is at shut down point.

In a short run , firm should temporarily suspend the production as fixed cost of $460 is not able to be recovered.