Question

You’ve been hired as an economic consultant to a price-taking firm that produces shirts. The firm already has a shirt factory, so it is operating in the short run. The price of shirts is $5, the hourly wage is $12, and each shirt requires $1 worth of material. At the current level of output (20 workers and 70 shirts per hour), the firm is losing money: Its total cost exceeds it total revenue. The firm has experimented with different numbers of workers and discovered that 21 workers would produce 72 shirts; 15 workers would produce 60 shirts; and 16 workers would produce 63 shirts. You job as a consultant is to tell the firm which of these four options to take; and explain and show your calculations as to why you selected an option. 1. Option 1: Shut down the unprofitable operation. Explain why giving numerical calculations? 2. Option 2: Continue to produce 70 shirts per hour. Explain why giving numerical calculations? 3. Option 3: Produce more shirts. Explain why giving numerical calculations? 4. Option 4: Produce fewer shirts. Explain why giving numerical calculations?

Answer 1

Given:
Price of the shirts : $5
hourly wage: $12
cost of material for each shirt: $1

Current Level
20 workers: 20 * 12 = 240
70 shirts per hour: 70 * 1 = 70
70 shirts sold at 5 = 70 * 5 = 350

Profit = Sales - Cost
P = 350 - 240 - 70
P = 350 - 310
P = 40

21 workers : 72 shirts
P = (72*5) - (21*12) - (72*1)
P = 360 - 252 - 72
P = 360 - 324
P = 36

15 workers : 60 shirts
P = (60*5) - (15*12) - (60*1)
P = 300 - 180 - 60
P = 300 - 240
P = 60

16 workers : 63 shirts
P = (63*5) - (16*12) - (63*1)
P = 315 - 192 - 63
P = 315 - 255
P = 60