Answer to Question #131643 in Economics for Tamira

Question

You've been hired by an unprofitable firm to determine whether it should shut down its operation. The firm currently uses 70 workers to produce 300 units of output per day. The daily wage (per worker) is $100, and the price of the firm's output is $30. The cost of other variable inputs is $500 per day. Although you don't know the firm's fixed cost, you know that it is high enough that the firm's total costs exceed its total revenue. You know that the marginal cost of the last unit is $30. Should the firm continue to operate at a loss? 

Answer 1

The firm should continue to operate at a loss, if its price is above the average variable cost (AVC).

$AVC = VC/Q = \frac{100×70 + 500} {300} = 25.$

So, P > AVC (30 > 25), and the firm should continue to operate at a loss.