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Calculating When a Firm Should Shut Down

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.

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Solution Preview

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

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

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.