Question
A multiproduct firm compares temporary shutdown with its best feasible operating product mix. Assume no shutdown/restart cost and unchanged unavoidable costs. Which pair of totals is sufficient for this comparison?
A. Past sunk investment
B. Last year’s revenue
C. Total revenue from the proposed operating mix
D. Total operating costs that would be avoided by shutting down
The correct answer is
C and D only
Compare C with D. Continuing the specified product mix is preferable if total revenue exceeds the operating costs avoided by shutting down, while common unavoidable costs cancel from the comparison. Equality gives indifference under the stated assumptions. Sunk costs and historic revenues do not determine this choice.
Was this answer helpful?
Important Questions from Short-run and long-run cost curves
- L shaped average cost curve is witnessed in the large firms because
- The minimum Long Run Average Cost (LAC) can be determined on a
I. LAC curve for a normal production function
II. LAC curve for a linear production function
III. Planning curve
IV. Envelope curve
Codes:
Need Expert Advice?
