# rules for short run and long run

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

https://brainmass.com/economics/short-and-long-run-cost-functions/rules-for-short-run-and-long-run-80712

#### 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.