Final answer:
A firm should not shut down immediately if its weekly revenue of $800 exceeds the variable costs of $700, as it still contributes to covering fixed costs. Fixed costs are not a factor in the immediate shutdown decision, as they are incurred regardless of operations. The firm should consider shutting down only if the price falls below the average variable costs, which is not the case here.
Step-by-step explanation:
If a firm's revenue is $800 per week and its variable cost is $700, the decision to shut down depends on comparing the average variable cost (AVC) and the price it receives for its product. Fixed costs, such as the mentioned sunk fixed cost of $2,400, should not factor into the immediate shutdown decision as they are incurred regardless of whether the firm is operating or not.
According to economic principles, if the price falls below the minimum AVC, a firm should shut down in the short run as it cannot cover its variable costs. In this case, since the given revenue exceeds variable costs, the firm covers its variable costs and generates a surplus that contributes to the fixed costs. Therefore, the firm should not shut down immediately.
Should the Firm Shut Down?
Considering the guidance in Table 8.6, which indicates that a firm must shut down if the price falls below about $1.65 to $1.72, the minimum AVC, we can infer that shutting down is pertinent when revenue does not cover variable costs. However, given the scenario with a revenue of $800 and variable costs of $700, this condition does not apply, implying that the firm should continue its operations despite the sunk fixed cost since shutting down would lead to a certain loss of the fixed costs without any revenue to offset it.
When evaluating the decision to operate or shut down, the firm must weigh the loss incurred from operating against the loss of shutting down. If staying open results in covering the variable costs with additional contribution to the fixed costs, it is financially sensible to remain operational. Conversely, if the firm's revenue cannot cover its variable costs, as shown in the case where revenues are $10,000 and variable costs are $15,000, it would be better to shut down and avoid incurring further variable costs.