Jul 12, 2017 Others

Short Run Shut Down Rule

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Short Run Shut Down Rule


A firm currently uses 40,000 workers to produce 180,000 units of output per day. The daily wage per worker is $100, and the price of the firm`s output is $28. The cost of other variable inputs is $500,000 per day. (Note: Assume that output is constant at the level of 180,000 units per day.)

Assume that total fixed cost equals $1,200,000. Calculate the values for the following four formulas:

•Total Variable Cost = (Number of Workers x Worker’s Daily Wage) + Other Variable Costs 

•Total Costs = Total Variable Costs + Total Fixed Costs 

•Total Revenue = Price * Quantity 

•Average Variable Cost = Total Variable Cost / Units of Output per Day 

•Average Total Cost = (Total Variable Cost + Total Fixed Cost) / Units of Output per Day 

Complete the following: 

•Calculate the firm’s profit or loss. Is the firm making a profit or a loss? 

•Explain the Short Run Shut Down Rule. Should this firm shut down? Please explain. 

Provide a report to the management of the firm that discusses what should be done. 

Be sure to show your work to support the decision that you outline in your report.


Econ Unit 3IP Name: Institution: Solutions * Total Variable Cost= ($40,000*$100) +$500,000)= $4,500,000 * Total Costs = $4,500,000+$1,200,000=5,700,000 * Total Revenue =$28*180,000=5,040,000 * Average Variable Cost =$4,500,000/180,000=$25 * Average Total Cost = ($4,500,000+$1,200,000)/180,000=$31.667 * Firm


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