Asked by
Peter Meneses
on Nov 04, 2024
Verified
The owner of Tie-Dyed T-shirts, a perfectly competitive firm, hires you to give him economic advice. He tells you that the market price for his shirts is $15 and that he is currently producing 200 shirts at an AVC of $10 and an ATC of $20. What would you recommend that he do?
A) Continue producing in the short run, as his loss from production is less than his fixed costs, but exit the industry in the long run if there are no changes in economic conditions.
B) Shut down in the short run, as he is incurring a loss, and leave the industry in the long run, if there are no changes in economic conditions.
C) Continue to produce in the short run, even though he is earning a loss, and expand production in the future hoping to increase market share and total revenue.
D) Tell him that you cannot make any recommendations until you know what his fixed costs are.
AVC
Average Variable Cost, which is the variable cost per unit of output, calculated by dividing total variable costs by the quantity of output.
ATC
Average Total Costs, which is the sum of all production costs (fixed and variable) divided by the quantity of output produced, detailing the average cost per unit of output.
Economic Conditions
The state of an economy at a given time, encompassing factors such as inflation, unemployment rates, and GDP growth.
- Determine the situations in which an entity should maintain operations, scale up, scale down, or cease in both immediate and extended durations.
- Gain an understanding of how average and marginal costs influence the determination of production quantities and profit margins.
- Implement the notions of average variable cost, average total cost, and marginal cost in making informed decisions.
Verified Answer
JW
Learning Objectives
- Determine the situations in which an entity should maintain operations, scale up, scale down, or cease in both immediate and extended durations.
- Gain an understanding of how average and marginal costs influence the determination of production quantities and profit margins.
- Implement the notions of average variable cost, average total cost, and marginal cost in making informed decisions.