The Ajax Manufacturing Company is selling in a purely competitive market. Its output is 100 units, which sell at $4 each. At this level of output, total cost is $600, total fixed cost is $100, and marginal cost is $4. The firm should A. Reduce output to about 80 unitsB. Expand its productionC. Continue to produce 100 unitsD. Produce zero units of output

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23 June, 09:51

The Ajax Manufacturing Company is selling in a purely competitive market. Its output is 100 units, which sell at $4 each. At this level of output, total cost is $600, total fixed cost is $100, and marginal cost is $4. The firm should A. Reduce output to about 80 unitsB. Expand its productionC. Continue to produce 100 unitsD. Produce zero units of output

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Answers (1)

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Vaughan · Answer 1

The correct answer is option D.

Explanation:

The total cost of the firm is $600.

The fixed cost is $100.

The variable cost will be

=Total costs-fixed costs

=$ (600-100)

=$500.

The average variable cost will be

=total variable costs/quantity of outputs

=$500/100

=$5 per unit

The price is $4.

So, we see the price is not covering the average variable cost. This means the firm is incurring losses. The firm will thus produce zero units of output.