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    rules for short run and long run

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    There is some data you are given, and on the basis of the data, you are asked to make a decision. Now here are some definitions
    TR = Total Revenue
    TC = Total Cost
    FC = Fixed Costs
    VC = Variable Costs
    Now, TC = FC + VC, and Profit = TR - TC = TR - FC - VC. Let us now substitute the data, and
    TR = $30 per unit * 300 units = $9000
    VC = $100 wages per worker * 70 workers = $7000
    Plus $500 per day
    So, VC = $7500. This means that TC = FC +$7500. Hence,
    Profit = $9000 - FC - $7500
    Profit = $1500 - FC
    The problem says that the firm is not profitable. This means that Profit < 0. Substituting
    Profit < 0 or $1500 - FC < 0
    Or, -FC < -$1500, or FC > $1500
    This is what we know from the data, do you see this? Now, here are the principles that determines our behavior
    1. If a company cannot pay its fixed costs, it should go out of business immediately
    2. If a company can pay its fixed costs, but cannot pay its variable costs, then eventually it will go out of business
    3. If a company can pay its fixed and variable costs, then it will remain in business
    Since we do not know the value for FC, our answer really depends on what value it takes on. So what we need here is a table. If FC > $9000, our revenue, then the recommendation is that the company should immediately go out of business, because we cannot pay our fixed costs. If FC < $9000, then we have to lay off workers

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    Solution Preview

    The rules are different for short run and long run.
    In short run,
    1. if TR>TC......Continue business profitabily i.e. FC < 1500 (which is not the case here)
    2. if TR<TC but TR>VC...the firm is able to ...

    Solution Summary

    This job considers rules for short run and long run.