Author Question: You've been hired by an unprofitable firm to determine whether it should shut down its operation. ... (Read 65 times)

clippers! · **on:** Jul 1, 2018

You've been hired by an unprofitable firm to determine whether it should shut down its operation. The firm currently uses 70 workers to produce 300 units of output per day.

The daily wage (per worker) is 100, and the price of the firm's output is 30. The cost of other variable inputs is 500 per day. Although you don't know the firm's fixed cost, you know that it is high enough that the firm's total costs exceed its total revenue. You know that the marginal cost of the last unit is 30. Should the firm continue to operate at a loss? Carefully explain your answer.

Question 2

Competitive firms earn zero profit in the long run when

A) entry is completely free.
B) entry is limited.
C) Both A and B.
D) Neither A nor B.

al · **Reply #1 on:** Jul 1, 2018

Answer to Question 1

VC = 7,000 + 500. Thus AVC = 7500/300 = 25. Since P > AVC, the firm should continue to operate in the short run.

Answer to Question 2

D