A firm currently uses 100 workers to produce 200 units of output per day. The da
ID: 1191010 • Letter: A
Question
A firm currently uses 100 workers to produce 200 units of output per day. The daily wage (per worker) is $80, and the price of the firm's output is $50. The cost of other variable inputs is $600 per day. The firm’s fixed cost is 8,000. The marginal cost of the last unit is $50.
Given the information, what is the profit or loss?
Should the firm continue to operate? Carefully explain your answer.
A firm currently uses 100 workers to produce 200 units of output per day. The daily wage (per worker) is $80, and the price of the firm's output is $50. The cost of other variable inputs is $600 per day. The firm’s fixed cost is 8,000. The marginal cost of the last unit is $50.
Given the information, what is the profit or loss?
Should the firm continue to operate? Carefully explain your answer.
Explanation / Answer
Finding the Total revenue first, TR = PRICE (of output)*QUANTITY.
TR = $50*200 = $10,000.
Total cost = fixed cost+other variable cost+wages = $8,000+$600+$(100*$80) = $16600.
Clearly, TC exceeds the TR by $6600, implying a LOSS.
But on the other hand, the TR is sufficient enough to cover the variable costs, that is, wages+other variable cost = $8000+$600 = $8600. This means that the firm should continue to operate rather than to shut down till the time it is unable to cover even its variable costs. The rationale is straightforward. By shutting down a firm avoids all variable costs, however it still have to pay the fixed costs, beacuse the fixed cost is to be paid regardless of the level of output, they should not be considered in deciding whether to produce or shut down. Thus a firm should compare the revenue and the variable cost. In this case the firm is able to cover some additional revenue over its variable cost, that is, revenue is $10,000 and variable cost is $8,600, which partially offsets the fixed cots.
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