Shutdown occurs when a firm recognizes that it can't earn enough revenue to cover their variable...
Shutdown occurs when a firm recognizes that it can't earn enough revenue to cover their variable costs. Many seasonal businesses make the choice to close up for several months every year. Explain this decision using the competitive market model. What are the specific factors they consider? How is this decision differ from going out of business permanently?
Homework Answers
1) for certain products such as printer where it can be mentioned that there is only seasonal demand and with the increase in the seasonal demand the product price goes up as a result of which it will be above the average variable cost so that the firm can still continue in the business and continue to recover its variable cost and part of fixed but what happens is that in the non season the average variable cost would be higher than that of the price due to low demand and that is the reason why they still couldn't recover the variable cost in that season and therefore they get to you shut down their business in that season and the specific factor that have to be considered in this case are the existing demand conditions, the logistics and the variable cost of production required for producing that product. It is different from going out of the business permanently because if that is the case then always the average variable cost is greater than the price irrespective of the season
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