Question

For a perfectly competitive firm, assume the price equals a rising marginal cost at 200 units of output. At this output, average total cost is $8 and average variable cost is $5. If the price is $4, by how much can this firm reduce its losses by shutting down?


$800


a

$600


b

$400


c

$200


d

$100

Answer 1

Produce: TR = P*Q = 4*200 = 800. TC = ATC*Q = 8*200 = 1,600 → loss = 800 − 1,600 = −$800.

Shut down: avoid variable costs (AVC*Q = 5*200 = 1,000) but pay fixed costs = TC − VC = 1,600 − 1,000 = $600 → loss = −$600.

Loss reduction = 800 − 600 = $200.

Answer: $200 (option d).