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Avoidable and unavoidable costs

Suppose, after graduation, you take a job in a factory in Chile that produces faux leather shoes. One day, your boss comes in and says, "this factory isn't operating at a profit and so we can minimize our losses by closing up shop." Yikes! You didn't think you'd lose your job that quickly. Your boss continues talking and states that the company is having to pay 300,000 pesos a month for rent, interest on debt, and other non-avoidable costs. He also says that it costs 150,000 pesos a month just to pay you and all the other workers, including paying for the raw materials, to produce the shoes. He states that at current production of 5000 boxes of shoes a month, the company can only expect to get 40 pesos per box of shoes.

A. IN THE SHORT RUN -- would you agree with your boss that the company should close up shop? Why or why not?
B. IN THE LONG RUN -- would you agree with your boss that the company should close up shop? Why or why not?

Please present your arguments and what you would do if you were the boss.

Solution Preview

Number of Units = 5000
Total Fixed Cost = 300,000
Average Fixed Costs = 300,000/5000 = 60
Total Variable Cost = 150,000
Marginal Cost = 150,000/5000 = ...

Solution Summary

The solution analyzes the short run and long run decision that a company should take based on a given cost structure.

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