You’ve been hired as an economic consultant to a price-taking firm that produces
ID: 1204042 • Letter: Y
Question
You’ve been hired as an economic consultant to a price-taking firm that produces shirts. The firm already has a shirt factory, so it is operating in the short run. The price of shirts is $5, the hourly wage is $12, and each shirt requires $1 worth of material. At the current level of output (20 workers and 70 shirts per hour), the firm is losing money: Its total cost exceeds it total revenue. The firm has experimented with different numbers of workers and discovered that 21 workers would produce 72 shirts; 15 workers would produce 60 shirts; and 16 workers would produce 63 shirts. You job as a consultant is to tell the firm which of these four options to take; and explain and show your calculations as to why you selected an option.
1. Option 1: Shut down the unprofitable operation. Explain why giving numerical calculations?
2. Option 2: Continue to produce 70 shirts per hour. Explain why giving numerical calculations?
3. Option 3: Produce more shirts. Explain why giving numerical calculations?
4. Option 4: Produce fewer shirts. Explain why giving numerical calculations?
Explanation / Answer
I am nnot sure but as per my knowledge i am doing this
The firm will shut down if MR<AVC. if firm is able to recieve its varibale cost it will operate.
the labor wage rate is 12 , and its variable in the short run,we can calculate variable cost by (labor x wage )
From the above schdeule MR is greater than AVC at all level of ouptut ,
The firrm will produce more shirts upto the point where AVC= MR, which is a breakeven point.
labor wage output varibale cost average variable cos price TR MR 15 12 60 180 3 5 300 16 12 63 192 3.04 5 315 15 20 12 70 240 3.4 5 350 35 21 12 72 252 3.5 5 360 10Related Questions
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