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Production And Perfect Competition - Market Activity - Coursework Example

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Production and Perfect Competition – Market Activity 1. Should the firm shutdown immediately when the total fixed cost equals $1,000,000? Should the firm shutdown immediately when the total fixed cost equals $3,000,000? For convenience in explanation, the situation where the Total Fixed Cost (TFC) equals to $1,000,000 is named as Case A and the situation where the TFC increases to $3,000,000 is named as Case B…
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Download file to see previous pages 2: Losses to be incurred in Case B Fig. 3: Other Variances As can be observed with reference to the above illustrated calculations for both the cases A and B, the firm is projected to witness significant changes in terms of its losses incurred. Apparently, in both the cases, the firm will have to suffer huge losses. However, when comparing both the cases, i.e. when the TFC is $1,000,000 and when the TFC is increased to $3,000,000, the firm will have to suffer greater losses in Case B with the rise in its TFC. To be noted, with the TFC amounted to $1,000,000, the firm is projected to incur a loss of $400,000; whereas, with a TFC increment to $3,000,000, the firm will have to suffer a huge loss of $2,400,000. Considering the amount of calculated per unit and per work loss for the given cases, it can further be observed that the loss incurring risks will increase substantially if the firm decides to operate with a TFC of $3,000,000, which can further be deemed a unrecoverable without huge sums of additional investments. On the other hand, the losses incurred in case A can be deemed as recoverable for the firm, subjected to its strategic and managerial efficiencies (Schmitz Jr., 2005). Therefore, comparing and contrasting the changes in the cost variables which the firm might have to incur in both the cases A and B, it can be suggested that the firm should immediately shutdown when its TFC increases to $3,000,000, i.e. in case B. 2. 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? Break-even is commonly defined as the situation when the total revenue of a firm equals the total amount of costs incurred for a given quantity of output (Armstrong, 2006). In other words, when the firm will incur neither loss nor profit, it can be stated that the firm has reached its break-even. Considering the calculations in fig. 1 of the above section, it can be apparently observed that for case B, the firm will have to incur a huge loss of $2,400,000 and therefore should shutdown immediately. In contrast, when the TFC amounts to $1,000,000 in case A, the firm will have to incur a loss of $400,000. Hence, it can be affirmed that the company can operate at a loss in the short run when its TFC is $1,000,000 incurring lesser loss than that projected in case B. Furthermore, when the firm incurs $400,000 loss in case A, it shall have to lay off 5,000 employees, assuming all other variables to be fixed. To be specific, with the given daily wage rate of $80, the total wage for 45,000 workers (i.e. 50,000-5,000 workers) will amount to $400,000 which is again equivalent to the loss projected to be incurred by the firm with a TFC of $1,000,000. Therefore, by laying-off 5,000 employees, the firm will be able to reduce it variable cost by $400,000 and consequently, will not have to incur any loss. In such circumstance, the total cost to be incurred by the firm will be, TFC ($1,000,000) + TVC ($4,400,000 - $400,000) = $5,000,000; equivalent to the total output of the firm. Hence, it can be concluded that by laying-off 5,000 employees, the firm can reach its break-even when TFC equals to $1,000,000. 3. Given a Lower Number of Employees Now Working at The Company, What is the Change in Worker Productivity? In the above illustrated calculations, it was derived that ...Download file to see next pages Read More
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