You have been hired by an unprofitable competitive firm to determine whether it should shut down its operation

The costs and revenues numbers are given as under:

• The per day output is 300 units
• The number of workers engaged in a day is 70
• The wage rate is $100 per worker

Total labor cost per day = number of workers engaged in a day * wage rate per worker
=70 * $100
=$7,000

• The other variable inputs is $500 per day

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.

Output Decisions:

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.