Rules for short and long run

Assignment Help Managerial Economics

Reference no: EM1372096

There is some information you are given, and on the basis of the information, 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

Reference no: EM1372096

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