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Production and Perfect Competition

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Production and Perfect Competition
Christopher Landeros

Production and Perfect Competition
When a firm is operating under a profit loss, it must decide whether to continue to operate under a short-run by reducing the number of employees or completely shutting down. To do this, the firm must calculate its Total Variable Cost, Average Variable Cost, Average Total Cost, and Productivity based on its fixed cost.
A firm that has a fixed cost of $1,000,000 would not be able to keep the company operating just to break even, because the worker productivity rate would increase from 4 to 26 based on the number of remaining employees. Based on the $ 1,000,000 fixed cost, here are the calculated figures.
1. Total Variable Cost = $4,400,000
2. Average Variable Cost = $22
3. Average Total Cost = $27
4. Worker Productivity = 4 The average variable cost would be $3 less than the output cost but an increase of $2 on the average total cost. In order for the firm to work under a $1,000,000 break even scenario, it would have to cut 42,500 employees. The re-calculated cost would be:
1. Total Variable Cost = 1,000,000
2. Average Variable Cost = $5
3. Average Total Cost = $10
4. Worker Productivity = 26 The average variable cost would be $3 less than the output cost but an increase of $12 on the average total cost. In order for the firm to work under a 3,000,000 break even scenario, it would have to cut 17,500 employees. The re-calculated cost would be:
1. Total Variable Cost = 3,000,000
2. Average Variable Cost = $15
3. Average Total Cost = $30
4. Work Productivity = 6 The recommendation to management would be to shut down the firm under the $1,000,000 scenario. Though the average variable cost would be $17 dollars less a unit the overall work production rate would increase from 4 units per employee to 26 units per employee. An increase of 22 units

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