Should a firmn shut down if its revenue is R =$800 per week, its variable cost i

Question

Should a firmn shut down if its revenue is R =$800 per week, its variable cost is VC=5700, and its sunk fixed cost is F= $2.400? This firm should 0 A, not shut down because variable cost is less than revenue. D. shut down because total cost is greater than revenue. not shut down because total cost is greater than variable cost. E. Should a firm shut down if its revenue is R = $800 per week, its variable cost is VC= $1,200, and its sunk fixed cost is F= S2.400? This firm should A. B, C. D. E. shut down because fixed cost is greater than revenue shut down because total cost is greater than revenue. not shut down because revenue is positive. not shut down because total cost is greater than variable cost. shut down because vanble cost is greater than revenue. This firm should A. shut down because revenue is declining. 0 B. shut down because unavoidable cost is less than revenue. D. shut down because avoidable cost is greater than revenue. OE. not shut down because revenue is postive

Explanation / Answer

(1)

The firm shut down point is where revenue is equal to variable cost.

So if Revenue is greater than variable cost firm will not shut down in short run because it minimises total cost if it continues to produce.

Since revenue (800) is greater than variable cost (700), so firm will continue to produce.

Hence option A is the correct answer.

The firm will not shut down because VC is less than revenue.

(2)

The firm shut down point is where revenue is equal to variable cost.

So if Revenue is less than variable cost firm will shut down in short run because it increases total cost if it continues to produce.

Since revenue (800) is less than variable cost (1200), so the firm will shut down production.

Hence option E is the correct answer.

The firm will shut down because VC is greater than revenue.

(3)

If revenue = 100,000 and unavoidable total cost = $200,000

Yes, the firm should shut down because the unavoidable cost is twice of revenue. If firm shut down it could save $200,000 but if it continues to produce in long-run it saves only 100,000 cost.

Hence option D is the correct answer.

This is because the unavoidable cost is greater than revenue.

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