A firm currently uses 40,000 workers to produce 180,000 units of output per day. The daily wage per worker is $100, and the price of the firm’s output is $28. The cost of other variable inputs is $500,000 per day. (Note: Assume that output is constant at the level of 180,000 units per day.)
Assume that total fixed cost equals $1,200,000. Calculate the values for the following four formulas:
· Total Variable Cost = (Number of Workers x Worker’s Daily Wage) + Other Variable Costs
· Total Costs = Total Variable Costs + Total Fixed Costs
· Total Revenue = Price * Quantity
· Average Variable Cost = Total Variable Cost / Units of Output per Day
· Average Total Cost = (Total Variable Cost + Total Fixed Cost) / Units of Output per Day
Complete the following:
- Calculate the firm’s profit or loss. Is the firm making a profit or a loss?
- Explain the Short Run Shut Down Rule. Should this firm shut down? Please explain.
Provide a report to the management of the firm that discusses what should be done.
Be sure to show your work to support the decision that you outline in your report.