Question

Megatron is a competitive firm operating under the following conditions: Price of output is $15, the profit maximizing level of output is 40,000 units, and the total cost (full economic cost) of producing 40,000 units is $650,000. The firm's only fixed factor of production is as $750,000 stock of capital (a building). If the interest rate available on a comparable risks is 8 percent, should this firm shut down immediately in the short run? Explain your answer.

Answer 1

Answer: So Megatron should continue in the short run because its income exceeds its Variable cost of production.

Explanation: 40.000 • $15=600,000

Total cost = 650,000

Fc=750.000*8%=60,000

VC: 650,000-60,000=590,000

So Megatron should continue in the short run because its income exceeds its Variable cast of production but the total Cost surpasses total revenue in the long run. In the long and short run when overall revenue is less than variable expenses the firm should shut down.

Answer 2

Firm should be shut down in short run

Step-by-step explanation:

We have given price of output = $15

Total economic cost = $650000

Total number of units for maximizing profit level = 40000

So average economic cost
`=(650000)/(40000)=$16.25`

As the average economic cost is greater than price of the output

So firm should be shut down in short run

Answer will be firm should be shut down in short run