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Pages:
1 page/≈275 words
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3 Sources
Style:
APA
Subject:
Business & Marketing
Type:
Essay
Language:
English (U.S.)
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Topic:

Short Run Shut Down Rule

Essay Instructions:

A firm currently uses 40,000 workers to produce 180,000 units of output per day. The daily wage per worker is $100, and the price of the firm's output is $28. The cost of other variable inputs is $500,000 per day. (Note: Assume that output is constant at the level of 180,000 units per day.)
Assume that total fixed cost equals $1,200,000. Calculate the values for the following four formulas:
•Total Variable Cost = (Number of Workers x Worker’s Daily Wage) + Other Variable Costs 
•Total Costs = Total Variable Costs + Total Fixed Costs 
•Total Revenue = Price * Quantity 
•Average Variable Cost = Total Variable Cost / Units of Output per Day 
•Average Total Cost = (Total Variable Cost + Total Fixed Cost) / Units of Output per Day 
Complete the following: 
•Calculate the firm’s profit or loss. Is the firm making a profit or a loss? 
•Explain the Short Run Shut Down Rule. Should this firm shut down? Please explain. 
Provide a report to the management of the firm that discusses what should be done. 
Be sure to show your work to support the decision that you outline in your report.

Essay Sample Content Preview:

Econ Unit 3IP
Name:
Institution:
Solutions
* Total Variable Cost= ($40,000*$100) +$500,000)= $4,500,000
* Total Costs = $4,500,000+$1,200,000=5,700,000
* Total Revenue =$28*180,000=5,040,000
* Average Variable Cost =$4,500,000/180,000=$25
* Average Total Cost = ($4,500,000+$1,200,000)/180,000=$31.667
* Firm's Profit/Loss=Total Revenue-Total Costs (5,040,000-5,700,000) =-$660,000
The firm makes a loss of $660,000
Short Run Shut Down Rule
In the short run, a firm should continue to operate if the price is greater than the average variable costs. Therefore in the short run a profit-maximizing firm will increase production only if marginal revenue is greater than marginal cost and decrease production if marginal revenue is less than marginal cost (Bhanu, 2011). The company's output price of $28 versus the average variable cost of $25 implies that the firm has sufficient marginal revenue to cover the marginal cost and hence it should continue with the operation.
Actions that should be taken by the management
The losses incurred by the firm are as a...
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