The firm currently uses 50,000 workers to produce 200,000 units of output per da

Question

The firm currently uses 50,000 workers to produce 200,000 units of output per day. The daily wage per worker is $80, and the price of the firm’s output is $25. The cost of other variable inputs is $400,000 per day.
Assume that total fixed cost equals $1,000,000. Calculate the values for the following four formulas:

* Total Variable Cost = (Number of Workers * Worker’s Daily Wage) + Other Variable Costs
* Average Variable Cost = Total Variable Cost / Units of Output per Day
* Average Total Cost = (Total Variable Cost +Total Fixed Cost) / Units of Output per Day
* Worker Productivity = Units of Output per Day / Number of Workers

Then, assume that total fixed cost equals $3,000,000, and recalculate the values of the four variables listed above.
For both cases, calculate the firm’s profit or loss.

For both sets of calculations, compare the firm’s output price and the calculated average variable cost and average total cost. Should the firm shutdown immediately when the total fixed cost equals $1,000,000? Should the firm shut down immediately when the total fixed cost equals $3,000,000?
For one of the cases, if the firm can operate at a loss in the short-run, how many employees need to be laid off in order for the company to break even? To calculate the number of workers to be laid off, divide the loss for the two situations by the daily wage per worker. Given a lower number of employees now working at the company, what is the change in worker productivity? Is the change in worker too large, and the firm should shut down immediately? Or in your opinion, can the workers increase their productivity, assuming that the units of output per day remain fixed at 200,000 units, so that the firm operates at a breakeven state?

Provide a two to four page report to management of the firm that discusses what should be done.
Be sure to show your work to support the decision you outline in your report.

Explanation / Answer

Yeah, this is pretty involved for one problem. I will walk you through the analysis: The firm currently uses 50,000 workers to produce 200,000 units of output per day. The daily wage per worker is $80, and the price of the firm’s output is $25. The cost of other variable inputs is $400,000 per day. Assume that total fixed cost equals $1,000,000. Calculate the values for the following four formulas: * Total Variable Cost = (Number of Workers * Worker’s Daily Wage) + Other Variable Costs Total VC=(50,000*$80)+$400,000=$4,400,000 * Average Variable Cost = Total Variable Cost / Units of Output per Day AVC=$4,400,000/200,000units=$22/unit * Average Total Cost = (Total Variable Cost +Total Fixed Cost) / Units of Output per Day Average TC=($4,400,000+$1,000,000)/200,000 units=$27/unit * Worker Productivity = Units of Output per Day / Number of Workers Worker Productivity=200,000units/50,000 workers=4 units/worker Profit=Revenue-Total Cost Revenue=P*Q=200,000*$25=$5,000,000 Total Cost=Total VC+Total FC Total Cost=$4,400,000+$1,000,000 Profit (Loss)=$5,000,000-$5,400,000=-$400,000 Then, assume that total fixed cost equals $3,000,000, and recalculate the values of the four variables listed above. For both cases, calculate the firm’s profit or loss. * Total Variable Cost = (Number of Workers * Worker’s Daily Wage) + Other Variable Costs Total VC=(50,000*$80)+$400,000=$4,400,000 * Average Variable Cost = Total Variable Cost / Units of Output per Day AVC=$4,400,000/200,000units=$22/unit * Average Total Cost = (Total Variable Cost +Total Fixed Cost) / Units of Output per Day Average TC=($4,400,000+$3,000,000)/200,000 units=$37/unit * Worker Productivity = Units of Output per Day / Number of Workers Worker Productivity=200,000units/50,000 workers=4 units/worker Profit=Revenue-Total Cost Revenue=P*Q=200,000*$25=$5,000,000 Total Cost=Total VC+Total FC Total Cost=$4,400,000+$3,000,000 Profit (Loss)=$5,000,000-$7,400,000=-$2,400,000 For both sets of calculations, compare the firm’s output price and the calculated average variable cost and average total cost. Should the firm shutdown immediately when the total fixed cost equals $1,000,000? Should the firm shut down immediately when the total fixed cost equals $3,000,000? In scenario 1 (FC=1,000,000), we should not shut-down in the short-run. In the short-run we will still have to pay our fixed costs (by definition). If we produce Q=0, then we will have a revenue=0, so our profit will be the negative of our fixed costs. We will lose $1,000,000. Since we only have a loss of $400,000 in the current situation, we should continue production. Production is allowing us to cover some of our fixed costs in the short-run. However, since we have profit

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.