Purchase Solution

Calculating When a Firm Should Shut Down

Not what you're looking for?

Ask Custom Question

Assume you are the plant manager for Crossroads Sign Company, which produces road signs in a market that approximates perfect competition. Due to a slow economy, business has been slow and the company is losing money every month. The owners have asked you whether to continue operations or to shut down at least until the economy improves. You have the following information available:

Marginal Revenue (MR) = $130
Total Cost (TC) = $1,100 + 135Q + 0.6Q2
Marginal Cost (MC) = 135 + 1.2Q

As the plant manager, should you recommend to the owners that the plant be shut down for a while? Justify your answer using at least two techniques and presenting the information graphically.

Purchase this Solution
Solution Summary

A perfectly competitive firm is taking an economic loss. Given data for the firm's revenue and costs, determine whether or not the firm should shut down production. 98 words of explanation with some calculations and a graph to back them up.

Solution Preview

Yes, the plant should shut down because it is not covering its variable costs.

Technique 1: The firm maximizes its profits when ...

Purchase this Solution
Free BrainMass Quizzes
Basics of Economics

Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.

Elementary Microeconomics

This quiz reviews the basic concept of supply and demand analysis.

Pricing Strategies

Discussion about various pricing techniques of profit-seeking firms.

Economic Issues and Concepts

This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.

Economics, Basic Concepts, Demand-Supply-Equilibrium

The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.

View More Free Quizzes
Related BrainMass Solutions

  • Shut down point

    Fixed costs are irrelevant (in the short-run) when the firm decides whether to shut down or operate.

  • Stay in business to complete the lease, or close.

    Total cost=$12000 Total Fixed cost = $6000 Total Variable cost = 12000-6000=$6000 Total Revenue = $4000 Since Total Revenue < Total variable cost firm should shut down right away.

  • Short-run and Long-run weak demand

    How would this option benefit the firm? The firm should shut down when it can't be able to cover its variable costs in the short run. As long as it can cover the variable costs, it can continue its operations. Let's explain this more detailed.

  • Define the terms: Long run and short run

    In the long run if losses continue the firm should always shut down....".

  • Layoff and shutdown decisions based on worker productivity

    Should the firm shutdown immediately when the total fixed cost equals $1,000,000? Should the firm shut down immediately when the total fixed cost equals $3,000,000?

  • Monopolist's demand function

    =0 Solving we get Q= 14.37 P=1624-4*14.34=1566.53 For price below 1566.53 the firm should shut down in long run.

  • Shut Down point

    Fixed costs are irrelevant (in the short-run) when the firm decides whether to shut down or operate. In the short run a firm knows it must pay these fixed costs regardless of whether or not it produces.

  • How many workers should a firm lay off to break even?

    Should the firm shutdown immediately when the total fixed cost equals $1,000,000? Should the firm shut down immediately when the total fixed cost equals $3,000,000?

  • Pure Competition and Relationship to Cost

    is less than the average variable costs, the firm is incurring a loss to produce and so should shut down.

View More Related Solutions