Shutdown and Break Even Decision<\/u><\/p>\n
Firms can’t endure a loss forever. The decision to shutdown involves a comparison between short run (SR) sunk costs and variable costs.<\/p>\n
Sunk costs<\/u> are costs that cannot be escaped in the SR. For example, a restaurant owner has signed a one-year lease on a building. Sunk costs remain even if the firm’s output falls to zero.<\/p>\n
If the firm shuts down TR = 0 and TVC = 0, but the TFC (or sunk costs) remain. Sometimes it is better to remain in operation until the sunk costs expire.<\/p>\n
There are two rules that govern the shutdown decision. Note: these rules hold for all firms and not just perfectly competitive firms.<\/p>\n
Rule 1<\/u>: if TR > TC then the firm earns positive profits and should remain open in the SR and the LR.<\/p>\n
Rule 2<\/u>: the firm should operate in the SR if TR > TVC, but should plan to close in the LR if TR<\/p>\n
Proof:<\/p>\n
Loss if the firm stays in business = TC – TR<\/p>\n
Loss if the firm shuts down = TFC = TC – TVC<\/p>\n
So the firm should keep operating in the SR if:<\/p>\n
TC – TR < TC – TVC<\/p>\n
or\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 TR > TVC.<\/p>\n
Reference:<\/p>\n
Principles of Economics, N.Gregory Mankiw, 7th edition.<\/p>\n","protected":false},"excerpt":{"rendered":"
Shutdown and Break Even Decision Firms can’t endure a loss forever. The decision to shutdown involves a comparison between short run (SR) sunk costs and variable costs. Sunk costs are costs that cannot be escaped in the SR. For example, a restaurant owner has signed a one-year lease on a building. Sunk costs remain even […]<\/p>\n","protected":false},"author":10,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-752","post","type-post","status-publish","format-standard","hentry","category-uncategorized"],"_links":{"self":[{"href":"https:\/\/bbs.binus.ac.id\/management\/wp-json\/wp\/v2\/posts\/752","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/bbs.binus.ac.id\/management\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/bbs.binus.ac.id\/management\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/bbs.binus.ac.id\/management\/wp-json\/wp\/v2\/users\/10"}],"replies":[{"embeddable":true,"href":"https:\/\/bbs.binus.ac.id\/management\/wp-json\/wp\/v2\/comments?post=752"}],"version-history":[{"count":2,"href":"https:\/\/bbs.binus.ac.id\/management\/wp-json\/wp\/v2\/posts\/752\/revisions"}],"predecessor-version":[{"id":770,"href":"https:\/\/bbs.binus.ac.id\/management\/wp-json\/wp\/v2\/posts\/752\/revisions\/770"}],"wp:attachment":[{"href":"https:\/\/bbs.binus.ac.id\/management\/wp-json\/wp\/v2\/media?parent=752"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/bbs.binus.ac.id\/management\/wp-json\/wp\/v2\/categories?post=752"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/bbs.binus.ac.id\/management\/wp-json\/wp\/v2\/tags?post=752"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}