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Foundations of Microeconomics Consumers and Firms - Essay Example

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I have recently analyzed the operations of your firm in regards to its loss and whether the firm should continue to produce or shutdown. Though the firm is currently losing money due to its fixed costs, it is my recommendation that the firm continue to produce.
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Foundations of Microeconomics Consumers and Firms
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Download file to see previous pages The output of the plant is 300,000 units per day at a cost of $30 per unit. The total revenue per day is 300,000 * $30 = $9,000,000. According to Parkin (2005), "A firm shuts down if the price falls below the minimum of average variable cost. The shutdown point is the output and price at which the firm just covers its total variable cost" (p.244).
As we can see, the total revenue exceeds the variable costs and it would be recommended to continue to produce. If sales continue to stagnate and drop, there will come a point at which shutdown will be advisable. When sales have reduced to the 250,000 unit level, it will be necessary to begin layoffs. The revenue at that point would be 250,000 * $30 = $7,500,000 and equal to the variable cost. To avoid shutdown, labor costs would need to be reduced.
The relationship between a change in price and the change in demand is known as elasticity. If a change in price results in no change in demand, this is known as perfectly inelastic demand (Parkin 2005 p. 84). This would be seen in the market for necessities such as electricity or heating fuel. If the ratio of price change is equal to the change in demand, this is known as unit elastic demand (Parkin 2005 p.84). With some items, such as food, an increase in price only results in a small change in demand. Consumers will cut back, but not eliminate, the product. This is known as inelastic demand (Parkin 2005 p.84). ...
The demand change is equal to 10 / 30 * 100 = 33.33%. The change in demand has a larger percentage decrease than the percentage of increase in price and is an elastic demand.
Part Three
As a policy maker concerned with correcting the effects of gases and particulates emitted by and local power plant, I would first look to command and control regulations. This is the simplest approach for the government and would transfer the cost of reducing the emissions to the consumer and the firm. While this may be the simplest, it may not be acceptable to environmentalists or the parties burdened with the cost. It is also difficult to enforce.
Vouchers are another method that should be considered. However, since the problem is a local power plant, the tactic might be ineffective. The firm could purchase vouchers and still continue to discharge pollutants. Charging an emissions fee for the amount discharged may be viewed as a penalty or fine for polluting and would be a cost passed on to the consumers. Taxing the pollutants would have the advantage of providing an economic incentive for compliance. These taxes, known as Pigovian taxes, can be useful in getting a firm to act as if they are bearing the total cost of the externalities (Parkin 2005 p.348).
The tax method seems to be the most efficient. Under the tax method, the tax rate is set at the cost of the externalities. The pollutants fall to the point that the cost to produce plus the tax reaches market equilibrium. Polluting above that point raises the cost beyond the marketable price. This would efficiently control the discharge and put the money in the hands of the government to be used to cover the external costs or tax reduction.
References
Parkin, M. (2005). Microeconomics (7th ed.). Boston: Pearson ...Download file to see next pagesRead More
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