Suppose that the MC of a manufacturing firm is birr 40 and its AVC is birr 50. In which stage of production is the firm operating?
The firm is operating in the short run stage of production. In the short run, a firm can only vary its variable inputs, such as labor and raw materials, while keeping the fixed inputs, such as capital and land, constant.
To determine the stage of production in which the firm is operating, we need to compare the Marginal Cost (MC) with the Average Variable Cost (AVC).
The MC is the additional cost incurred by the firm to produce one additional unit of output. In this case, the MC is birr 40.
The AVC is the total variable cost (TVC) divided by the number of units produced. If the AVC is higher than the MC, it means that the cost of producing each additional unit is higher than the average cost of producing all units.
In this scenario, the AVC is birr 50, which is higher than the MC of birr 40.
Based on this information, we can conclude that the firm is operating in the short run and experiencing losses. It is operating in the stage of production where the average variable cost is higher than the marginal cost.
To determine the stage of production a firm is operating in, we need to compare the Marginal Cost (MC) with the Average Variable Cost (AVC):
1. If MC < AVC, the firm is operating in the short-run stage of production.
2. If MC = AVC, the firm is operating at the minimum point of the AVC curve, also known as the shutdown point.
3. If MC > AVC, the firm is operating in the short-run stage of production.
In this case, the given MC (Marginal Cost) is birr 40, and the AVC (Average Variable Cost) is birr 50. Since MC < AVC (40 < 50), the firm is operating in the short-run stage of production.