Say you are the manager of a perfectly compeitive firm selling a product. Your b

Question

Say you are the manager of a perfectly compeitive firm selling a product.  Your business is making a loss because total revenue is less than total costs.  What would you do--shut down or continue to operate?  Use hypothetical numbers to explain.  Information you need to provide inclue-state the product you are selling, the price of the product, the quantity of the product you produce, fixed costs total costs, fiqure out total revenue, total and average variable costs.  Then go ahead and make your decision.  Explain carefully why it makes better sense to shut down rather than continue to operate or to continue to operate rather than shut down, as the case maybe. How do fixed costs play a role in your analysis?  What is the difference between shutting down and going out of business?

Explanation / Answer

If you are the manager of this company, you cannot know whether to shut down simply based on the factors that you ask about in this question. The total revenue and total costs are not the numbers that are used to determine whether to shut a business down. Instead, you need to determine what your marginal revenue (MR) is and what your average variable costs (AVC) are. If your MR is less than your AVC, then you shut down. If your MR is greater than your AVC, you keep producing, regardless of whether your total revenues are lower than your total costs.

Let us imagine that you own a hotel and that it is the off season for your area. Let us further imagine that your average fixed costs (for things like the mortgage on your hotel) are $50 per room per night. Let us assume that the AVC (for things like housekeeping services) is $45 per room per night. This means your total cost for renting a room out for the night is $95. What do you do if you can only charge $50 per night for the room? You are losing $45 per night, so shouldn

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