Determine the possible circumstances under which the company should discontinue operations. Suggest key actions that management should take in order to confront these circumstances. Provide a rationale for your response. (Hint: Your firm’s price must cover average variable costs in the short run and average total costs in the long run to continue operations.)
- Here, you have to find the profit maximizing or loss-minimizing quantity and price. Then, determine whether the company is making a profit. To find the value of Q and P, you should use the marginal rule MR = MC.
- MC function is given.
- You should calculate MR by using the demand function from Assignment 1: Qd = 38,650 – 42P.
- First, inverse the demand function to show the price in terms of quantity: P = 920.238 – 0.0238Q.
- Then, find the TR function, which is equal to price times quantity TR = (920.24 – 0.0238Q)*Q = 920.24Q – 0.0238Q2.
- Finally, find MR which is the derivative of TR with respect to quantity, i.e., MR = 920.238 – 0.0476Q.
- Next, set MR equal to the MC given in the second assignment and solve for the profit maximizing or loss minimizing Q and P.
- When you find the values of Q and P, you can plug in the number for Q into the TR function to find the TR and in the TC function, to find the TC.
- Then subtract TC from TR to find the total profit.
- If you get a negative number, the firm is making a loss.
- If the number is positive, the firm is making a profit.
- If the firm is making a loss, you should figure out whether the firm should continue to produce at a loss in the short run, or shut
- To answer this question, you should compare the TR with VC, or price with AVC. If the firm is making a loss and the TR is higher than VC or the price is higher than the AVC, then it would be better off producing rather than shutting down because it will be able to cover some of its fixed cost. But if TR is smaller than VC, or if price is smaller than AVC, the firm will be better of shutting down
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