Explore BrainMass

Deciding Whether to Shut Down: Short vs. Long Run

Your firm currently uses 69 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 $100 per day. Fixed costs are $2100 per day. What is total cost (TC)? What is average cost (AC)? What is variable cost (VC)? What is average variable cost (AVC)? Is the firm profitable? Should it stay in business in the short run? Should it stay in business in the long run? Show your work and explain your answers.

Solution Preview

Total Revenue (TR) = PQ
TR = (30)(300)
TR = 90000

VC = (Wage)(Workers) + 100
VC = (100)(69) + 100
VC = 7000

AVC = 7000/300
AVC = 23.33

TC = FC ...

Solution Summary

This solution uses mathematical analysis of costs and revenues to determine whether a losss-making firm should shut down or continue to produce output. Both the short-run and long-run cases are shown.