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4. Determine the possible circumstances under which the company should discontinue operations. Suggest key actions that...

4. Determine the possible circumstances under which the company should discontinue operations. Suggest key actions that management should take in order to confront these circumstances. Provide a rationale for your response. (Hint: Your firm’s price must cover average variable costs in the short run and average total costs in the long run to continue operations.)

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Answer #1
  • Firm decides based on the cost of production. Firm must discontinue production if it incurs losses.
  • short run: In short run, firm must continue to produce as long as it is able to recover the average variable cost (AVC). Point below the AVC is called shutdown point. First is ready to bear the losses of Average fixed cost in short run.
  • Long Run: in long run all factor of proudction are variable, hence firm must recover average cost of production. Firm will stop production if it is not able to recover the AC in long run.
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