### CFA Practice Question

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### CFA Practice Question

You've been hired by an unprofitable firm to determine whether it should shut down its operation. The firm currently uses 70 workers to produce 300 units of output per day. The daily wage (per worker) is \$100 and the price of the firm's output is \$30. The cost of the other variable inputs is \$500 per day. Although you don't know the firm's fixed costs, you do know that they are high enough that the firm's total cost exceeds total revenue. What is the best recommendation you can make, based on the information that you have?

A. Exit the industry in the long run.
B. Shut down in the short run.
C. Continue to produce in the short run.

Total revenue = (30)(300) = \$9,000. Variable cost = (70)(100) + 500 = \$7,500. Average variable cost = 7,500/300 = \$25. Since 30 > 25, P>AVC, and the firm should not shut down in the short run since they are covering variable costs (and some of fixed costs). There is not enough information to tell what the firm should do in the long run.