Answered: Should a firm shut down if its revenues…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Should a firm shut down if its revenues is TR = $1,500 per week and:

a. its variable cost is TVC = $1,100 and its sunk fixed cost is TFC = $800?

b. its TVC = $1,600 and is TFC = $600?

c. its TVC = $1,100 and its TFC = $1000 ($800 of which is avoidable if it shuts down?)

Expert Solution

Step 1

Shut down: It refers to a position of a firm when variable cost greater than the revenue earned.

Should a firm shut down if its revenues is TR = $1,500 per week and

a. its variable cost is TVC = $1,100 and its sunk fixed cost is TFC = $800

b. its TVC = $1,600 and is TFC = $600

c. its TVC = $1,100 and its TFC = $1000 ($800 of which is avoidable if it shuts down)

Case 1.

$T R = $ 1, 500 T V C = $ 1, 100 S T F C = $ 800 P r o f i t = T R - T C P r o f i t = T R - (T V C + T F C) = $ 1, 500 - ($ 1, 100 + $ 800) = - $ 400 T h e f i r m c a n c o n t i n u e t h e b u \sin e s s b e c a u s e i t c a n b e a r t h e v a r i a b l e \cos t .$

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