Explain the reasoning behind the shutdown rules. When is it appropriate to operate with a loss?
What will be an ideal response?
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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In the 1980s the CEO of Coca Cola corporation found out that its core business was making roughly 15% rate of return on investor capital
However, he also discovered that some of the newly acquired subsidiaries were not making anywhere near that amount. He decided to ask each of these companies to come up with a plan to push the rate of return closer to the 15% mark or he warned that these companies might be sold. Why would the CEO sell off companies or operations that are still profitable?
The Taylor rule predicted a federal funds rate which was ________ that set when Paul Volcker was chairman of the Fed, and a rate which was ________ that set when Arthur Burns chaired the Fed
A) less than; equal to B) greater than; less than C) greater than; equal to D) less than; greater than
A monopolist that is earning economic losses will, in the long run,
a. exit the industry. b. shift it's demand curve rightward. c. stay in the industry, since eventually the price will have to rise. d. encourage competitors to enter the industry in order to enliven it.
The manufacturer of South Face sells jackets to retail stores for $120 each, and it requires the retail stores to charge customers $150 per jacket. Any retailer that charges less than $150 would violate its contract with South Face. What do economists call this business practice?
a. predatory pricing b. resale price maintenance c. tying d. leverage