Purchase Solution

Principles of Microeconomics

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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 -- do you agree with your boss that the company should close up shop? Why or why not?

B. IN THE LONG RUN -- do 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.

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The price per box is 40. The average variable cost is 150,000/5000 = 30. The average total cost is (300,000+150,000)/5000 = 90

Answer A: Since the price is ...

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