Answer to Question #68454 in Microeconomics for Jake Murrow
3) 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.
If the firm continues to operate its facility, its total revenue will be $9,000 = $30 times 300 units of output. This is the benefit of operating the facility. The cost of operating the facility is the variable cost, which equals the sum of labor costs ($7,000 = the $100 wage times 700 workers) and the cost of other variable inputs ($500). Total revenue exceeds variable cost, so it is sensible to continue operating the facility in the short run.
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