Question

Assume that this monthly situation will continue for some time, and you are in the short run.

Fixed Costs                $10,000

Variable Costs           $ 5,000

Total Costs                 $15,000

Revenue                     $12,000

Total Costs                 $15,000

Profit/Loss                 $( 3,000) (A loss)    

Should you shut down operations or would it be better to continue running?

Answer 1

If the firm is making losses at the profit-maximising level of output, the decision whether to shut-down or continue to produce are determined by the following condition

The shut-down condition

P=minimum of AVC=MC

The given data of the firm are;

Fixed Costs                $10,000

Variable Costs           $ 5,000

Total Costs                 $15,000

Revenue                     $12,000

Total Costs                 $15,000

Profit/Loss                 $( 3,000) (A loss)    

As it can be seen in the data that when firm continue to produce, then firm loss is $3,000 but when firm shut-down, then firm will bear loss of $10,000 which is fixed cost.

Hence it is better to produce and bear loss of $3,000 and minimise the loss..

Hence it is better to running and bear loss $3,000 which is less than the loss of shut-down $10,000.