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Homework answers / question archive / You have been hired by an unprofitable competitive firm to determine whether it should shut down its operation
You have been hired by an unprofitable competitive firm to determine whether it should shut down its operation. The firm currently uses 70 workers to produce 300 units of output per day. The daily wage (per worker) is $100, and the price of the firm's output is $30. The cost of other variable inputs is $500 per day. Although you do not know the firm's fixed cost, you know that it is high enough that the firm's total costs exceed its total revenue. You know that the marginal cost of the last unit is $30.
a) TVC is $ _____,
b) AVC is $ _____,
c) In the short run, the firm _____ (enter should or should not) continue to operate at a loss because Price is _____ (enter greater, less, or equal) than/to AVC.
The costs and revenues numbers are given as under:
Total labor cost per day = number of workers engaged in a day * wage rate per worker
=70 * $100
=$7,000
a) Total variable cost (TVC) = Total labor cost per day + other variable inputs per day
=$7,000 + $500
=$7,500
b) Averagevariablecost=TotalvariablecostperdayoutputAveragevariablecost=Totalvariablecostperdayoutput
Averagevariablecost=7,500300Averagevariablecost=7,500300
Averagevariablecost=25Averagevariablecost=25
c) In the short run, the firm should continues to operate at a loss because the price is greater than AVC.
In the short run, the marginal cost is equal to the marginal cost at $30 per unit, and the average variable costs are $25 per unit. It shows, the revenue earned covers total variable cost and some portion of fixed costs per unit, and should continue till its marginal revenue is equal to the average variable costs, and this is a trigger point for the shutdown.
The firm projects the market conditions in the short and long-run periods and makes the output decisions accordingly. The maximum output to be considered in competitive, monopolistic, and monopoly markets in the short run are when marginal cost is equal to marginal revenue.
