Info

Output per time period

$1 per unit. This loss consists of a fixed cost component ($2.00 - $1.40 = $0.60) and a variable cost component ($1.40 - $1.00 = $0.40). Thus, the total loss is

Total Loss = (100 Units) X ($0.60 Fixed Cost Loss + $0.40 Variable Cost Loss) = $100

If the firm simply shut down and terminated production, it would not incur variable costs, and its loss would be reduced to the level of fixed costs, or 100($0.60) = $60.

Price fails to cover variable costs at prices below $1.25, the minimum point on the AVC curve, so this is the lowest price at which the firm will operate. Above $1.25, price more than covers variable costs. Even though total costs are not covered at prices less than $2, it is preferable to operate when $1.25 < P < $2 and earn at least some profit contribution to cover a portion of total fixed costs rather than to shut down and incur losses equal to total fixed costs.

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