Below what price level would the firm shut-down?
Complete Table Below (1-9): Basic Formula Excel formulas for the various functions: Using the power of Excel (first row formulas) use Fill- Down function to complete each column to save yourself from creating a calculation in each cell (very time-consuming). Ignore the : mark when creating the formulas. See the next worksheet for instructios for using the fill- Price/Demand Curve (surfboards) Quantity $300 $290 $280 $270 $260 $250 $240 $230 $220 $210 $200 $190 $180 $170 $160 $150 $140 $130 $120 $110 $100 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Price x Quatity above. TFC PxQ does not vary from unit to :=b14c14 |Sum all of the fixed costs from $300 $580 $840 $1,080 $1,300 $1,500 1) Total Revenue 2) Total Fixed (TR) Cost (TFC) $1,680 $1,840 $1,980 $2,100 $2,200 $2,280 $2,340 $2,380 $2,400 $2,400 $2,380 $2,340 $2,280 $2,200 $2,100 Enter figure $600 $600 $600 $600 $600 $600 $600 $600 $600 $600 $600 $600 $600 $600 $600 $600 $600 $600 $600 $600 $600 Unit variable Total Total Revenue – cost (average Variable Cost variable) x + Total Fixed Total Cost Quantity AVC x Q Cost TFC + TVC TR-TC :=50C 14 :=e14+f14 3) Total Variable Cost 4) Total Cost (TVC) (TC) 50 100 150 200 250 300 350 400 450 500 550 600 650 700 750 800 850 900 950 1000 1050 $650 $700 $750 $800 $850 $900 $950 $1,000 $1,050 $1,100 $1,150 $1,200 $1,250 $1,300 $1,350 $1,400 $1,450 $1,500 $1,550 $1,600 $1,650 :=d14-g14 5) Profit -$350 -$120 $90 $280 $450 $600 $730 $840 $930 $1,000 $1,050 $1,080 $1,090 $1,080 $1,050 $1,000 $930 $840 $730 $600 $450 Change in (Total Revenue) /(Change in Quantity) :=sum (d15- |:=sum (g15- d14)/(c15- |g14)/(c15- C14) c14) 6) Marginal Revenue (MR) $280 $260 $240 $220 $200 $180 $160 $140 $120 $100 Change in (Total Cost) /(Change in Quantity) $80 $60 $40 $20 $0 -$20 -$40 -$60 -$80 -$100 7) Marginal Cost (MC) 50.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 Total Cost / Quantity TC / Q :=g15/c15 8) Average Total Cost (ATC) Total Variable Cost / Quantity TVC / Q |:=f15/c15 350.0 250.0 200.0 170.0 150.0 135.7 125.0 116.7 110.0 104.5 100.0 96.2 92.9 90.0 87.5 85.3 83.3 81.6 80.0 78.6 9) Average Variable Cost (AVC) 50 50 50 50 50 50 50 50 50 50 50 50 50 50 50 50 50 50 50 50
The Correct Answer and Explanation is:
Correct Answer:
The firm should shut down if the price falls below $50, which is the Average Variable Cost (AVC) at all levels of output.
Explanation
In microeconomics, the shut-down point is the price level at which a firm’s total revenue (TR) just covers its total variable cost (TVC). When price < AVC, the firm cannot even cover its variable costs and thus loses more money by operating than by shutting down. Therefore, the firm should shut down in the short run.
Looking at the data you provided:
- The Average Variable Cost (AVC) remains constant at $50 across all quantities (this is typical for a linear cost structure with constant variable cost per unit).
- This means that as long as the market price is $50 or above, the firm can cover its variable costs and contribute something toward fixed costs.
- However, if the market price drops below $50, the firm’s revenue per unit becomes less than the variable cost per unit, meaning it loses more money by producing than by halting production.
For example:
- At a price of $40, if the firm sells one unit, its revenue is $40 but its variable cost is $50. It loses $10 in addition to the fixed cost of $600.
- If the firm shuts down, it loses only the fixed cost of $600.
- Therefore, producing at prices below $50 increases losses beyond what the firm would lose by shutting down.
The shut-down price is therefore equal to the AVC, which is $50. Below this level, shutting down minimizes losses.
Conclusion:
The firm should shut down when price < $50. This threshold ensures the firm does not operate at a loss greater than its fixed costs. As long as the price is at least $50, the firm should continue operating in the short run.
