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.
Assume that total fixed cost equals $1,000,000. Calculate the values for the following four formulas:
- Total Variable Cost = (Number of Workers x Worker’s Daily Wage) + Other Variable Costs
- Average Variable Cost = Total Variable Cost / Units of Output per Day
- Average Total Cost = (Total Variable Cost +Total Fixed Cost) / Units of Output per Day
- Worker Productivity = Units of Output per Day / Number of Workers
Complete the following:
- Calculate the firm’s profit or loss.
- Compare the firm’s output price and the calculated average variable cost and average total cost.
- Should the firm shut down immediately when the total fixed cost equals $1,000,000?
- If the firm can operate at a loss in the short run, how many employees need to be laid off for the company to break even? (Assume that after layoffs, the remaining workers maintain output at 200,000 units per day.)
- To calculate the number of workers to be laid off, divide the loss for the two situations by the daily wage per worker.
- Given a lower number of employees now working at the company, what is the change in worker productivity?
Provide a report to management of the firm that discusses what should be done.
Be sure to show your work to support the decision you outline in your report.