You have been hired by an unprofitable firm to determine whether it should shut down its unprofitable 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 input 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 cost exceeds its total revenue.
We have to consider what is the meaning of the shut down point. The output level at which price equals average variable cost and losses equals the total fixed costs, whether the firm produces or not. Also the lowest point on the AVC curve at which AVC=MC.
Now here Total Variable Cost= $100*70+500=$7500
Average Variable Cost= $7500/300=$25.
This solution is comprised of a concise, 240 word response, which explains the concept of the shut-down point and how it can be applied to the specific scenario in question. Basic calculations pertaining to this question have been included.