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    Analyzing an unprofitable firm

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    You've been hired by an unprofitable firm to determine whether it should shut down its unprofitable operation.
    The firm currently uses 50,000 workers to produce 200,000 units of output per day. The daily wage (per worker) is $80, and the price of the firm's output is $25. The cost of other variable inputs is $400,000 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. Provide a report to management of the firm as to whether or not it should continue to operate at a loss? Be sure to show your work to support the decision you outlined in your report

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    Solution Preview


    The objective of every firm is to maximize its profits. In case firm is making loss, it will try to minimize its losses.

    In the given case, let us analyze firm's variable costs.

    Number of workers employed=50000
    Labor costs=Number of workers employed*wage rate=50000*80=$4000000
    Other variable costs=$400000
    Total Variable Costs=$4000000+$400000=$4400000
    Total output=200000 units
    Average Variable ...

    Solution Summary

    Solution describes the steps to analyze the cost statistics of a unprofitable firm and make suitable recommendations. Report and calculations are described in about 250 words.