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Microeconomics - Math Problem Example

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For example, if the company decides not to fly, it will still incur the fixed costs as they are not related to the output. It will only save the variable costs. In this situation there's no revenue as firm's planes are lying idle. In this situation the firm will still have to pay its insurance and incur depreciation incurring a loss of $4000. However, if it flies between the two cities it makes a loss of only $2000. Hence, it is better for the company to fly between the two cities. However, if it keeps on making losses and they extend to the long-run, then it is better for the firm to shut-off its operations and invest its capital in an industry, where it could make a normal profit.
b) At the product price of $28, the production will fall to 5 units. At his point the firm will be making a loss of = 140 - 175 = ($35). Despite the loss, the firm will continue to produce as it covering its variable costs.
c) At the product price of $22, there will be no production at all. Looking at the data, the firm will try to equate its price with MR and the resulting output according to this should be 2 units. However, the revenue gained from this will be only $44, whereas the average costs will be $75, as a result the firm will not produce at all as its revenue is less than average costs and it will only increase the loss if the firm decides to go with the production.
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Looking at the data, one might say that it is not feasible for the company to be flying between the two cities as it implies a loss of $2000 (Total Revenue - Total Cost). However, rationality of the situation according to the economic analysis is that the firm should continue to operate and should fly between the two cities in the short-run…
Author : remingtonondric
Microeconomics Math Problem essay example
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