Question
Asked Nov 16, 2019
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A firm sells 1,000 units per week. It charges $70 per unit, the average variable costs are $25, and the average costs are $65.
1. What should the firm do in the short run? Why?
2. What should the firm do in the long run? Why?
3. At what price would the firm consider shutting down in the short run?
4. At what price would the firm consider shutting down in the long run?

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Expert Answer

Step 1

In the short run, firm must continue operating as long as it generates enough revenues to cover its variable costs. When price is equal to variable cost it must shut down in the short run.

In the long run, both the fixed costs and variable costs must be covered by the firm. The firm must shut down operations at price equal to average total costs.

 

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Q 1000 units P $70 ATC = $65 AVC $25 AFC $65 - $25 = $40

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Step 2

Part 1)

In the short run, firm must continue operations as long as the price is equal to or above $25

Step 3

Part 2)

Firm must continue operations as long as it covers both fixed...

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