Assume that total fixed cost equals $1,000,000. Calculate the values for the following four formulas:

Then, assume that total fixed cost equals $3,000,000, and recalculate the values of the four variables listed above.

For both cases, calculate the firm’s profit or loss.

 

For both sets of calculations, compare the firm’s output price and the calculated average variable cost and average total cost. Should the firm shutdown immediately when the total fixed cost equals $1,000,000? Should the firm shut down immediately when the total fixed cost equals $3,000,000?

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? To calculate the number of workers to be laid off, divide the loss for the two situations by the daily wage per worker. Given a lower number of employees now working at the company, what is the change in worker productivity? Is the change in worker too large, and the firm should shut down immediately? Or in your opinion, can the workers increase their productivity, assuming that the units of output per day remain fixed at 200,000 units, so that the firm operates at a breakeven state?

 

Provide a two to four page report to management of the firm that discusses what should be done.

Be sure to show your work to support the decision you outline in your report.

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Perfect competition is the first of four basic market models that we study in this course.

Choose a market for a good in your area that seems to be a perfectly competitive market. Write four or five substantive paragraphs that describes the market and answers the following questions:  

• Identify the buyers and sellers as well as the goods or services.
• How closely do real world conditions match the characteristics listed in the model?
• Are the sellers price takers?
• Do they compete using price?
• Is the good in question standardized?
• Is this market regulated by government in any way
• Explain the competitive environment.