Identify firms that periodically shut down their operations. What are the condit
ID: 1167902 • Letter: I
Question
Identify firms that periodically shut down their operations. What are the conditions that exist when they shut down their operations and the conditions that exist when they resume their operations? Explain your reasoning. Identify firms that periodically shut down their operations. What are the conditions that exist when they shut down their operations and the conditions that exist when they resume their operations? Explain your reasoning. Identify firms that periodically shut down their operations. What are the conditions that exist when they shut down their operations and the conditions that exist when they resume their operations? Explain your reasoning.Explanation / Answer
A shutdown point occurs for a firm when it fails to cover even its variable cost with revenue.
The goal of a firm is to maximize profits or minimize losses. The firm can achieve this goal by following two rules. First, the firm should operate, if at all, at the level of output where marginal revenue equals marginal cost. Second, the firm should shut down rather than operate if it can reduce losses by doing so.
Shut down differs from exiting an industry. Shutting down implies is temporarily suspending production.It does not imply that the firm is leaving an industry permanently. A firm that has shut down is not producing, but it still retains its capital assets; however, the firm cannot leave the industry or avoid its fixed costs in the short run.
Firms that p[eriodically shut down might be those which are facing lesser demand because of seasonal utility of their good that they provide. For example, a retailer of winter clothes may shut down in summer becuase of very low demand that may not give him revenue enough to cover its variable cost.
The condition that prevails, when a firm decides to shut down, includes the fir,s inability to have revenue to cover even its variable cost of production . That is R < VC where R = revenue and VC = variable cost.
The firm then resumes its operation s when its revenue exceeds variable cost that is R>VC.