Explain the reasoning behind the shutdown rules. When is it appropriate to operate with a loss?
1 . The firm will make a profit if total revenue (TR) exceeds total cost (TC). In that case, it should not plan to shut down either in the short run or in the long run.
2 . The firm should continue to operate in the short run if TR exceeds short-run variable cost (TVC). It should plan to close in the long run if TR is less than TC.
The first rule requires no explanation. The second rule relies on the distinction between fixed and variable costs. The firm can avoid variable costs in the short run by shutting down. However, it is unable to avoid fixed costs by shutting down. If a firm shuts down, its losses will equal the amount of its fixed costs. If revenue exceeds total variable cost (or, equivalently, if price exceeds the minimum of average variable cost), the firm should operate, pay all variable costs and some portion of fixed costs, to minimize losses.
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A barter economy refers to a situation in which goods and services are traded for other goods and services, with no money involved in transactions. The major shortcoming of a barter economy is
A) transactions cannot take place without money. B) the requirement of a double coincidence of wants. C) government has no way of collecting taxes. D) goods and services have no way of storing value.
People increase their labor supply in response to a temporary increase in government purchases because
A) current or future taxes will increase, making them financially worse off. B) they need to work more to keep up with their neighbors. C) interest rates will rise, causing a substitution effect. D) higher spending today will lead to higher spending in the future, as well.
Suppose a firm has 100 machines and 100 shares outstanding. The price per share is $2, and the purchase price of a machine is $1. So Tobin's q is equal to
A) 2. B) 1. C) 0.5. D) 1.5.
Related to the Economics in Practice on page 281: The foreign visitors to the temples of Laos are typically much richer than the local Laotians. This tends to make the foreign visitors ________ buyers when it comes to ticket prices to enter the temples.
A. less elastic B. more elastic C. perfectly inelastic D. perfectly elastic