Search results
Results from the WOW.Com Content Network
Thus in determining whether to shut down a firm should compare total revenue to total variable costs (VC) rather than total costs (FC (fixed costs) + VC). If the revenue the firm is receiving is greater than its variable cost (R > VC) then the firm is covering all variable cost plus there is additional revenue which partially or entirely ...
On the other hand, if the marginal revenue is less than the marginal cost (<), then too its total profit is not maximized, because producing one unit less will reduce total cost more than total revenue gained, thus giving the firm more total profit. In this case, a "rational" firm has an incentive to reduce its output level until its total ...
Total revenue can help with a firm's operational decision: whether the firm should be shut down or kept open. In the short run, if the total revenue (TR) that a firm can earn from operating will not exceed the variable costs (VC) of operation, the firm should be shut down. If TR < VC, shut down.
Average variable cost plus average fixed cost equals average total cost (ATC): + =. A firm would choose to shut down if the price of its output is below average variable cost at the profit-maximizing level of output (or, more generally if it sells at multiple prices, its average revenue is less than
In the short run, a firm operating at a loss [< (revenue less than total cost) or < (price less than unit cost)] must decide whether to continue to operate or temporarily shut down. [23] The shutdown rule states "in the short run a firm should continue to operate if price exceeds average variable costs". [ 24 ]
If the revenue that it is receiving is greater than its variable cost but less than its total cost, it will continue to operate while accruing an economic loss. If its total revenue is less than its variable cost in the short run, the business should shut down. If revenue is greater than total cost, this firm will have positive economic profit.
Decrease production if marginal cost is greater than marginal revenue; Continue producing if average variable cost is less than price per unit, even if average total cost is greater than price; Shut down if average variable cost is greater than price at each level of outputs; The decisions of the firm impacts consumer decisions.
Both the marginal cost and marginal revenue are extremely important in economics as a firm's profit is maximized when the marginal cost is equal to the marginal revenue. [26] Managers can make business decisions on the output level based on this analysis in order to maximize the profit of the firm.