Question

2. During the Covid-19 outbreak, restaurants have been deciding between temporarily shutting down and staying open to serve meals to a small number of customers. A firm that shuts down decreases some but not all of its costs. What type of costs will a restaurant save by shutting down? What costs will it have to pay even if it is shut down? Fully explain your answer including an example of each type of cost.

3. “Unlike the bigger, well-capitalized car companies, the thousands of parts firms that feed

   the industry’s global supply chain operate closer to the edge with less of a cash cushion...”

Why are there only a small number of auto companies, but “thousands of auto parts firms?” Be thorough with your answer including relevant economic terminology and graphical analysis.

Answer 1

During the Covid-19 outbreak, restaurants have been deciding between temporarily shutting down and staying open to serve meals to a small number of customers. A firm that shuts down decreases some but not all of its costs. By sutting down temporarily the firm can save its variable cost i.e. the cost of operating the restaurant this includes the labor cost, raw materials, etc. But even if it shuts down it have to pay the fixed cost which includes the rent of the building or land, rent of the machinery used in production etc.

Unlike the bigger, well-capitalized car companies, the thousands of parts firms that feed the industry’s global supply chain operate closer to the edge with less of a cash cushion...” There are only small number of Auto companies but thousands of auto parts firms because of the requirement of a large capital stock for the auto companies. The Auto companies are established on a large scale and hence need a large amount of capital(money) in order to start and have to compete with the existing firms and attract customers. But in case of an auto parts firms each firm produces only a particular part of the car and hence it needs a smaller capital base to start and operate.