Tuesday, April 30, 2013

Produce or Not in the Short Run?

Joe R. asks:

Working on  a question with a full chart to reference but am lost where to get the date for the answer. The question ask about the product price of $56, will this firm produce in the short run.?

My response:

There is a fairly complete analysis of the general issues in the video Short Run Cost.  The question is asking, in effect, whether there is any output level were Average Variable Cost is below $56.  If the answer is yes, then producing at that output level nets some producer surplus (the difference between revenue and variable cost), so it makes sense to produce.  If not, then it is best not to produce.

Note that the fix cost is not relevant for this calculation.  It is sunk in the short run and therefore must be paid regardless of whether production occurs.  

Your chart that you refer to may not have Average Variable Cost broken out, in which case you must compute it by dividing Total Variable Cost by Output.  If it is broken out, then it is simply a matter of eyeballing it to see if it ever is below $56.

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