Economy Short Run Shut Down Rule

Topics: Costs, Variable cost, Economics of production Pages: 2 (449 words) Published: May 7, 2012
Carolyn Lawrence
American Intercontinental University
ECON220 Microeconomics
Short Run Shut Down Rule

This paper will break down the productivity of a company using two different fixed costs to decide whether or not they should shut down immediately or if they can stay in business for the short run and make changes. In this case the change than will be examined is layoffs, though this should not be the first consideration, or should not be done unless it is first considered and found to be the only alternative.

The firm currently uses 50,000 workers to produce 200,000 units of output per day. The daily wage per worker is $80, and the price of the firm’s output is $25. The cost of other variable inputs is $400,000 per day. First scenario assuming that total fixed cost equals $1,000,000: * TLC 4,000,000

* TFC $1,000,000
* TVC 4,400,000
* AVC 22.
* ATC 27.
* WP (L) 4.
* TC 5,400,000
* TR 5,000,000
TR = $5,000,000 › $4,400.000 TVC
PROFIT= -$600,000 (loss)
Price = $25.›$22. AVC = -$3.
Layoffs= loss $600,000/$80. = 7,500 workers
After laying off 7,500 workers, this firm is running at a profit of $200,000, which for this company is not ideal, however I feel that it should stay in business for the short run. 7,500 workers from 50,000 still leaves 42,500 which I feel is sufficient to keep up with the workload, therefore this firm has enough revenue and resources to keep going until they can find ways to increase their revenue. Second scenario assuming that total fixed cost equals $3,000,000: * TLC 4,000,000

* TFC $3,000,000
* TVC 4,400,000
* AVC 22.
* ATC 37.
* WP (L) 4.
* TC 7,400,000
* TR 5,000,000
Profit= -2,400,000 (loss)
Price = $25.›$22. AVC = -$3.
TR $5,000,000 › TVC $4,400,000
Layoffs = loss $2,400,000/w $80. = 30,000
This scenario, though it now has a positive...
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