Forced To Shut Your Doors
Forced to Shut Your Door
When a corporation has begun to take a loss they may consider closing down all operations. While this would be the easy way out, many firms continue to operate during such hard times. There are several steps that can be taken to restore the business "out of the red", such as bankruptcy, restructuring and negotiating with their creditors.
The Firm's Shut-Down Decision
The decision to shut-down is a short-run decision, a day-to-day decision to temporarily halt production in response to market conditions (O'Sullivan and Sheffrin, 2006). The firm's objective is to maximize its economic profit, which equals its total revenue minus its total cost, where "cost" refers to economic cost (O'Sullivan and Sheffrin, 2006). Using the marginal principle, the typical firm will maximize profit where the market price equals the firm's marginal cost. The shut-down price is the price at which the firm is indifferent between operating and shutting down (O'Sullivan and......
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