Question

True False-Ambiguous and Explain Why 3. If total fixed costs are $500 per day, labor is the only variable cost and wages are $100 per worker per day, then the firm with the production data below will shut-down if the price is below $3 per unit. L 0 3 5 6 8 12 Q 0 100 200 300 400 500

Answer 1

The total fixed costs are $500 per day and labor is the only variable input and thus, labor cost is the only variable cost, in this case. The labor cost is given as $100 per worker per day and hence, when the firm hires or employs 3 units or when L=3, the total variable cost of production or the labor cost incurred by the firm=($100*3 units of labor)=$300 and at this point, the average variable cost of the firm=$300/3=$100. Now, as the firm hires 5, 6, 8, and 12 units of labor, it will incurr $500, $600, $800, and $1200 as the tota variable costs respectively. Now, considering the market price of $3 per unit of output and the total output level or Q of 100 units, the total revenue earned by the firm would be=($3*100 units)=$300 and the total variable cost incurred by the firm at this point is also $300 indicating that the firm earns just exactly enough revenue to cover its total variable cost of production. But if the firm, decides to hire more than 3 units of labor in the production process, the total revenue would not be sufficient to cover the total variable cost of prodiction and hence, would shut down. Only when it hires 3 units of labor, the firm is just able to cover the total variable cost of production from the total revenue it obtains if the per-unit outpur price is $3 and thus, the 100 units of output is the shut-down point of the firm. Now, since, the production or the output data corresponding to 1 unit and 2 units of labor hired by the firm is not available, it can reasonably assumed that if the per-unit market price of the output falls below $3 then the total revenue earned by the firm would drop below the total variable cost of production if the firm wants to produce the same level of output by hiring or employing the same units of labor in the production process. Therefore, based on this line of argument, the firm will shut-down and will not hire any labor and poduce any output if the per-unit output price falls below $3 based on the data and information presented in the question. Therefore, the given statement in the question is True.