Answer to Question #122048 in Microeconomics for akram

Question #122048
1. Ajax is a competitive firm operating under the following conditions: Price of output is $5, the profit-maximizing level of output is 20,000 units of output, and the total cost (full economic cost) of producing 20,000 units is $120,000. The firm’s only fixed factor of production is a $300,000 stock of capital (a building). If the interest rate available on comparable risks is 10 percent, should this firm shut down immediately in the short run? Explain your answer
1
Expert's answer
2020-06-15T11:12:42-0400

The decision for the firm to shut down is based on whether the total revenue is greater then the total variable cost.


The total revenue is:



TR=$5×20,000=$100,000TR = \$5\times 20,000 = \$100,000

The firm's total cost is:



TC=$120,000TC = \$120,000

The cost of capital is 10%10\% and the stock is worth $300,000\$300,000 . Thus, the fixed cost is:



FC=10%×$300,000=$30,000FC = 10\%\times \$300,000 = \$30,000

This means that the variable cost is equal to:



VC=$120,000$30,000=$90,000VC = \$120,000 - \$30,000 = \$90,000

Since the firm's total revenue is more than its variable costs, the firm should not shut down in the short run.


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