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30 September, 05:12

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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  1. 30 September, 05:23
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    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.
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