Jul 12, 2017 Others

# Short Run Shut Down Rule

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# Short Run Shut Down Rule

INSTRUCTIONS:

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.

CONTENT:

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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