A firm has fixed costs of 10,000. It receives a price of $15 for each unit of output. Average variable costs are lowest (equal to $10) at 1000 units of output. What advice would you give this firm in the short-run? in the long-run? carefully explain.
The fixed cost of producing a product by the firm is $10000. The price at which the product can be sold is $15 per unit. The variable cost is lowest when 1000 units are produced and is equal to $10 per unit.
If 1000 units are produced, the total cost incurred is $10000 + $10*1000 = $20000. The revenue earned when the units are sold is $15000. As the revenue earned is less than the cost of the units the firm makes a loss of $5000. But this is the case only in the first batch that is produced.
If an assumption can be made that the firm can produce an unlimited number of batches of 1000 units each without having to spend anything more on the fixed costs incurred initially, the firm makes a profit of $5000 on each batch of 1000 units starting from the second batch.
The short-term advice to the firm would be to produce the product; a loss would have to be incurred in the first batch of units sold but from the second batch through future the firm makes a profit, so long-term advice would be the same as short-term.