Concept: Short-Run Shutdown Decision 2 Question Help Bob is a general contractor

Question

Concept: Short-Run Shutdown Decision 2 Question Help Bob is a general contractor in the construction industry. Suppose the construction industry is perfectly competitive. In the short run, assume the marginal cost of building new homes equals the market price of a new home when Bob builds 10 new homes. At this level of output, Bob's average fixed cost of building a new home is $250,000 and his average variable cost is $120,000 per home (so his average total cost is $370,000 per home). If new homes are selling for $210,000, should he continue to produce 10 new homes in the short run or shut down? and lose SEnter your response as a whole number) In the short run, Bob should Enter your answer in the answer box and then click Check All parts showing

Explanation / Answer

The shut down point occurs when the revenue does not cover even variable cost.

At 10 homes total revenue is 210000*10 = $2100000

And total variable cost is 120,000*10 = 1200000

As you can see that total revenue exceeds total varible cost

that is 2100000>1200000

Hence the revenue is able to cover variable cost. Thus Bob should continue building homes.

In short run BOb should contiue building 10 homes and would loose 3700000*10 - 2100000 = $1600000

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