Question

Consider a firm that produces 500,000 units per year. The firm's fixed costs are $100,000, marginal costs are $250 and the price per unit is $400. In the short-run, how low can price go before it is profitable to shut down? Select one: a. $150 b. $250 c. $250.20 d. $400

Answer 1

b. $250

Step-by-step explanation:

In the given case, the marginal cost of firm is $250 per unit.

This marginal cost is constant. When the marginal cost is constant, it reflects the average variable cost.

average variable cost is also $250 per unit.

A firm shuts down when price is less than the average variable cost.

The price can go as lows as $250 per unit before the firm decides to shut down.

If price goes below the $250 per unit then firm will definitely shut down.