Foundations of Microeconomics: Discussing Consumers and Firms
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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 70,000 workers to produce 300,000 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 $500,000 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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A company can operate with less than acceptable profits or even if its into losses. The company must understand the concept of the shut down point. The shut down point is "a point of operations where a firm is indifferent between continuing operations and shutting down temporarily. The shutdown point is the combination of output and price where a firm earns just enough revenue to cover its total variable costs." (Investopedia, 2009)
As per Investopedia "if a firm can produce revenue greater or equal to its total variable costs, it can use the additional revenue to pay down its ...
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