Question

How do you calculate:

how much do the firm left if they shut down.

Please indicate what formula and what methods should I use If you can use graphs or examples to support your explanation, that would be great.

Answer 1

We can understand what will be left with the firm if they decide to shut down -

Profit = Total Revenue - Total Cost

Total Revenue (TR) is the price times quantity. If quantity = 0 (since firm will not produce anything), then TR = 0.

Total Cost of production is equal to fixed cost and variable cost. Variable cost varies with the level of output. If output = 0, then variable cost = 0. However, the fixed cost will stay unaffected with this level of output.
Let us call Fixed cost = F.

Profit = 0 - F - 0 = - F

Thus, the firm will lose $F should it decide to shut down. One can think of what will the firm lose should it decide to shut down. The only cost it would incur will be the fixed cost defined in terms of purchased machinery or equipment.