3. You\'ve been hired by an unprofitable firm to determine whether it should shu

Question

3. You've been hired by an unprofitable 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 don't 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. Should the firm continue to operate at a loss? Explain your answer.  

Explanation / Answer

Total Variable Costs (per day): TVC = # of workers * wage per worker + other variable inputs = = 70 * $100 + $500 = = $7500. Total Revenues (per day): TR = units of output per day * price of the firm's output = = $30 * 300 = = $9000 TR > TVC; this means that keeping the operation alive covers the variable costs and the firm has also $1500 to cover some of its fixed costs. If the firm shut down its unprofitable operation it will lose the profit of keeping the operation alive ($1500) that is now helping to cover its fixed costs. So although the firm is losing money as a result of the fixed costs, in the shor-run, it will lose more money if it shuts down the operation.

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