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Elective microeconomics for business

microeconomics for businessTU Board 2082

A firm’s average revenue is Rs.200, average cost is Rs.220 and average variable cost is Rs.175. The firm, suffering from loss, should shut down or stay in business in short run.

2

Answer

· Based on the official syllabus and past papers
Updated

The firm’s average revenue (AR) = Rs. 200, average cost (AC) = Rs. 220, and average variable cost (AVC) = Rs. 175. Since AR < AC, the firm incurs a loss per unit. However, the shutdown rule in the short run is to compare AR with AVC:

  • AR (Rs. 200) > AVC (Rs. 175) → The firm covers variable costs and part of fixed costs.
  • Loss per unit = AC – AR = Rs. 220 – Rs. 200 = Rs. 20.

Since AR > AVC, the firm should stay in business in the short run to minimize losses. Shutting down would incur a higher loss equal to fixed costs (FC = AC – AVC = Rs. 45). Thus, operating at a loss is preferable to shutting down.

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