Breakeven, Shutdown, and Scale Flashcards
Challenge Questions
Firm Alpha operates under perfect competition with a fixed cost of $300,000, variable costs of $20 per unit, and sells its product at a market price of $25 per unit. In the short run, the firm is producing 80,000 units. Should the firm continue to operate in the short run, and what would be its profit or loss?
A. The firm should continue to operate in the short run as it covers variable costs, with a profit of $100,000.
B. The firm should shut down immediately in the short run as it incurs losses greater than fixed costs, with a loss of $200,000.
C. The firm should continue to operate in the short run, minimizing losses at $100,000.
D. The firm should shut down in the short run because price is below ATC, with losses equal to total fixed costs of $300,000.
C. The firm should continue to operate in the short run, minimizing losses at $100,000.
Beta Manufacturing, operating in an imperfectly competitive market, has total revenue (TR) of $500,000, total variable costs (TVC) of $400,000, and total costs (TC) of $600,000. Should Beta Manufacturing continue to operate in the short run, and what strategic adjustments should be made in the long run?
A. Continue operating in the short run as TR > TVC, but shut down in the long run unless costs are reduced or revenues are increased above TC to achieve breakeven.
B. Shut down in the short run because TR < TC and continue operations in the long run only if total revenue increases significantly.
C. Continue to operate in both the short and long run as the firm can eventually cover fixed costs by optimizing production scale to minimize ATC.
D. Shut down in both the short and long run due to unsustainable losses, as TR does not meet total costs.
A. Continue operating in the short run as TR > TVC, but shut down in the long run unless costs are reduced or revenues are increased above TC to achieve breakeven.
Gamma Corp., a price-taker firm, currently operates where price equals $10, average variable cost (AVC) is $8, and average total cost (ATC) is $12. If the firm produces 50,000 units, what is Gamma Corp’s optimal short-run decision, and what would be the impact on long-run sustainability?
A. Continue operating in the short run with a total loss of $100,000, but exit in the long run as the price is below ATC, signaling unsustainable operations.
B. Shut down immediately as losses are greater than fixed costs, with a total loss of $200,000 in the short run and a similar impact in the long run.
C. Continue to operate in both the short and long run by adjusting production processes to reduce AVC and achieve breakeven at 50,000 units.
D. Maintain operations in the short run but invest in scale expansion to achieve economies of scale that will reduce ATC below price in the long run.
A. Continue operating in the short run with a total loss of $100,000, but exit in the long run as the price is below ATC, signaling unsustainable operations.
Delta Enterprises is facing diseconomies of scale with its long-run average total cost (LRATC) rising due to increased production. Its LRATC is $15 per unit when producing 100,000 units but rises to $18 per unit at 150,000 units. What should Delta’s strategic response be, and how does this align with optimal scale theories?
A. Decrease production to 100,000 units to minimize LRATC and operate at the minimum efficient scale, avoiding further diseconomies of scale.
B. Expand production further to 200,000 units, leveraging potential bulk discounts from suppliers that could counteract current diseconomies.
C. Maintain production at 150,000 units but focus on improving internal processes and management efficiency to reduce the impact of rising costs.
D. Reorganize production to operate at different plants, thereby flattening the LRATC curve and achieving constant returns to scale across multiple facilities.
A. Decrease production to 100,000 units to minimize LRATC and operate at the minimum efficient scale, avoiding further diseconomies of scale.
Epsilon Inc. is a tech firm operating under imperfect competition with total costs consistently exceeding total revenue, even at optimal production levels. If Epsilon’s TR is $1.2 million, TVC is $1.1 million, and TC is $1.5 million, what should Epsilon’s short-run and long-run decisions be, and why?
A. Continue to operate in the short run to minimize losses, as TR > TVC, but shut down in the long run unless drastic revenue improvements occur.
B. Shut down immediately in the short run since the firm cannot achieve breakeven, and explore alternative markets in the long run.
C. Maintain operations short-term while adjusting production inputs, aiming to reduce TVC below TR and improve profitability long-term.
D. Exit the market entirely, both in the short and long run, as no strategic adjustments would sufficiently cover the cost gap.
A. Continue to operate in the short run to minimize losses, as TR > TVC, but shut down in the long run unless drastic revenue improvements occur.
Zeta Corp., a manufacturing firm, currently operates under conditions of economies of scale with its LRATC decreasing from $25 per unit at 10,000 units to $20 per unit at 30,000 units. If Zeta plans to expand to 50,000 units, what potential outcomes should it consider regarding its cost structure?
A. Expansion will likely further reduce LRATC, enhancing Zeta’s competitive positioning and market share, provided operational efficiency is maintained.
B. Increasing production could introduce diseconomies of scale, potentially raising LRATC due to management inefficiencies and increased overhead.
C. Zeta should maintain current production levels at 30,000 units to ensure the cost structure remains optimal without risking diseconomies.
D. Diversify production into new product lines at 50,000 units to spread fixed costs and maintain the benefits of economies of scale across multiple markets.
B. Increasing production could introduce diseconomies of scale, potentially raising LRATC due to management inefficiencies and increased overhead.
Omicron Auto operates under perfect competition with a market price of $12 per unit. Its AVC is $10, and its ATC is $14. What are Omicron’s best short-run and long-run operational decisions, given current market conditions?
A. Continue operations in the short run to minimize losses, but plan to shut down in the long run unless ATC can be reduced below market price through operational adjustments.
B. Shut down in both the short and long run as price fails to meet ATC, rendering any continued production economically unsustainable.
C. Operate in the short run while immediately investing in technology to reduce AVC, thereby achieving breakeven and potential profitability in the long run.
D. Maintain full production capacity in the short run and raise prices marginally to meet ATC, achieving breakeven without losing market position.
A. Continue operations in the short run to minimize losses, but plan to shut down in the long run unless ATC can be reduced below market price through operational adjustments.
Theta Pharmaceuticals faces a long-run decision regarding shutdown or continued production. Its TR is projected at $2 million annually, TC at $2.5 million, and TVC at $1.8 million. With competition intensifying, what should Theta’s approach be, considering economies and diseconomies of scale?
A. Continue operating in the short run as TR > TVC, but consider a long-run exit unless costs can be managed more effectively through achieving economies of scale.
B. Shut down immediately to prevent further financial drain and reallocate resources towards more profitable divisions within the firm.
C. Invest in expanding production facilities to gain economies of scale, potentially lowering TC below TR and turning losses into profits in the long run.
D. Maintain current operations but restructure the business model to focus on high-margin products that can cover TC more effectively.
A. Continue operating in the short run as TR > TVC, but consider a long-run exit unless costs can be managed more effectively through achieving economies of scale.
Iota Corp. has been facing increasing ATC due to diseconomies of scale as it scales up production. Its current LRATC is $22 per unit at 80,000 units but expected to rise to $28 at 100,000 units. What strategic action should Iota take to realign with cost-efficient production?
A. Scale back production to the point where LRATC is minimized, aiming for constant returns to scale and stabilizing cost pressures.
B. Further increase production to dilute fixed costs over a larger volume, reducing LRATC even if current operations exhibit inefficiencies.
C. Reevaluate the entire supply chain and implement technology-driven solutions to counteract the effects of diseconomies of scale at current output levels.
D. Shift focus towards leaner production processes that emphasize quality over quantity, reducing ATC by operating at minimum efficient scale.
A. Scale back production to the point where LRATC is minimized, aiming for constant returns to scale and stabilizing cost pressures.
Sigma Enterprises is a price-searcher in an imperfect market with declining revenue. Currently, its TR is $1.5 million, TVC is $1.3 million, and TC is $2 million. What is Sigma’s optimal strategy in the short run, considering potential shutdown points and market positioning?
A. Continue operations short-term to minimize fixed costs while seeking strategic partnerships to enhance revenue and reduce TVC, or exit in the long term if unprofitable.
B. Shut down immediately in the short run as ongoing operations deepen financial losses, and pivot towards new product lines with better market fit.
C. Maintain production levels but cut TVC aggressively by renegotiating supplier contracts and streamlining production processes.
D. Gradually scale back operations while maintaining market presence, utilizing retained earnings to sustain operations through the economic downturn.
A. Continue operations short-term to minimize fixed costs while seeking strategic partnerships to enhance revenue and reduce TVC, or exit in the long term if unprofitable.
