Scenario 9.1: 21st Century Pen Inc.produces 2000 pens per day,and hires 20 workers at a cost of $200 per day per worker.The price of each pen is $5 each.21st Century Pen Inc.pays a daily rental rate of $60 on its factory and a daily insurance rate of $20.21st Century Pen Inc.has a ten year lease on the factory and insurance contract for a year,the company has no other expenses.
-Refer to Scenario 9.1.Suppose that 21st Century Pen Inc.continues to produce the same level of output and hires the same number of workers.21st Century Pen Inc.will shut down in the short run if the price falls below:

Question

Quizplus · Accepted Answer

To determine whether or not the company should shut down in the short run, we need to calculate the company's total variable costs and compare them to their total revenue. 
Total variable costs = (20 workers x $200) + $60 (rental rate) + $20 (insurance rate) = $4,080 per day 
Total revenue = $5 x 2000 pens = $10,000 per day

If the price falls below $2 (less than the variable cost of $2.04 per pen), then the company will not be able to cover its variable costs and should shut down in the short run to minimize its losses. Therefore, the best choice is B.