Essay on Economics Unit 3

605 Words Mar 1st, 2011 3 Pages
DeNorris Lee
Economics 220
Unit 3 Individual Project
March 1, 2011

PROBLEM:
A firm currently uses 50,000 workers to produce 200,000 units of output per day. The daily wage per worker is $80, and the price of the firm's output is $25. The cost of other variable inputs is $400,000 per day. Although you do not know the firm's fixed cost, you know that it is high enough that the firm's total costs exceed its total revenue.
Assume that total fixed cost equals $1,000,000. Calculate the values for the following four formulas: * Total Variable Cost = (Number of Workers * Worker's Daily Wage) + Other Variable Costs * Average Variable Cost = Total Variable Cost / Units of Output per Day * Average Total Cost = (Total Variable
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Fixed costs are irrelevant in the short run because they have ruined the costs. In both cases, the firm receives $25 with variable costs of $22 per unit, so it can cover variable costs; it should not shut down instantly in either case.

For the break-even number of workers:

This is the first example, it would be: $400,000 loss divided by $80 per worker, or 5,000; lay off 5,000 workers, leaving a workforce of 45,000.

This is the second example, it would be: $2,400,000 loss divided by $80 per worker, or 30,000; lay off 30,000 workers, leaving a workforce of 20,000.

The first case is likely to occur; it is asking remaining employees to increase production by 11% (4.4/4, then times 100). This level of increase happens all the time during a recession.

'The second case is not likely to occur; it is asking remaining employees to increase production by 250% (10/4, then times 100). I believe that this would be asking too much. This means that break-even is not possible.

References: Economics, 2nd Edition, Krugman & Well Worth, Retrieved on February 18, 2011 from Chapters 6, 7,9,11 and

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