MNG ECO WEEK 3 DQ #2: . What is more important to a manager Marginal Revenue or
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Question
MNG ECO WEEK 3 DQ #2:
. What is more important to a manager Marginal Revenue or Marginal Profit? Provide examples.
b. What Shutdown Rule means for a business entity? Should managers opt for a shutdown decision if the company is selling below its Fixed Costs? Explain your statement.
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Explanation / Answer
Marginal revenue is a concept which explains the extra revenue which a producer get or earn through an extra unit of output or we can say loss of revenue due to one unit less of production.On the other hand marginal profit is the change in profit i.e change in difference between marginal revenue and margigma cost due to change in one unit of production. Now marginal revenue will be the more key issue here because a manager will be always have profit maximization motive. The profit will be maximised where marginal revenue is equal to marginal cost. At this point marginal profit will be zero. So producer will sell or produce as long as marginal profit is positive and marginal profit will be positive as long as marginal revenue is greater than marginal cost. So marginal revenue is an area where producer will watch and as long as producer will get it as positive and greater than marginal cost will continue its production. When this marginal revenue equal to marginal cost then that point will be maximum profit earning point. No more extra profit is possible beyond that point. So if manger look for marginal revenue and marginal then marginal profit will automatically come.
Shut down rule or shut down point is a point where price is equal minimum of average variable cost. It means if price becomes lower than average variable cost then it is not possible to continue the business. This Price is equal to minimum of AVC point is called shut down point. The shut down rule should be whether price is equal to minimum of average variable cost or not. If price is more than the minimum of AVC then it may continue its business and if price is lower than average variabe cost business can not be continued.
No, the manager should not opt for a shutdown business when price or company selling below its fixed cost. Because fixed cost is a cost which the company will recover after a period of production. The fixed cost is cost which the company do one time. It does not change with production. If variable cost is covered with selling then manager will continue the business. The average fixed cost will decline as much as production will increase. The selling price should be the above of average variable cost. The average fixed cost will be less and less if production continue. Though if selling propr is lower than average cost but more average variable cost the company will make loss but it is not a situation the company has to shutdown. The company knows if it sells below the fixed cost it does not matter rather the company will be more interested to sell more than average variabe cost.
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