- October 27, 2019 at 12:36 pm
Provided the selling price is above the average variable cost the firm will produce even if the price is below the average total cost. For example, it would be worth producing and item for an additional cost of $7 if it sold for $10. The $3 difference helps towards covering fixed costs.October 28, 2019 at 5:06 am
VC per unit = $100 and is constant.
Total FC = 50,000.
If 5000 units are made then
AVC = $100, just the constant VC per unit.
ATC = ($100 x 5000 + 50,000)/5000 = $110.
If the selling price is $108, say, it is worth making and selling because each unit causes another VC of 100 and generated 108 of revenue. The fixed costs are fixed. The profit/loss would be
Revenue 5000 x 108 = 540000
VC 5000 x 100 = 500000
There is a loss of 10000, but if no units were made the loss would equal the FC of 50,000. If the FC could be avoided then the firm should do so (eg by closing down) but FC cannot usually be avoided in the short term. Here, even though a profit is not made, the loss is less than it would have been had no units been made and sold. .
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