If a comparison between average cost and price reveals whether a firm is earning profits, then a comparison between average variable cost and price reveals _____

Economics Dec 07, 2020

If a comparison between average cost and price reveals whether a firm is earning profits, then a comparison between average variable cost and price reveals _____.

Expert Solution

The comparison between the average cost and price is indicative of whether a given firm is earning profit from selling goods or services as the overall profit is determined by multiplying the number of units sold with the difference between price and average cost.

On the other hand, the comparison between the average variable cost and price gives an idea about the contribution margin earned per unit. The total contribution margin earned is used to recover the fixed costs first and then some profits get accumulated for the firm.

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