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Microsoft to Lay Off 10,000 Workers as Slowdown Hits Software Business

EconEye Admin

Microsoft plans to eliminate 10,000 jobs in response to the global economic slowdown. Declining PC sales are squeezing Microsoft’s Windows business. Worldwide shipments were down 29% in the fourth quarter last year compared with the previous year.—wsj.com

Answer the following questions to check your understanding of the story.

How do Microsoft’s TFC and TVC change when Microsoft eliminates jobs and produces fewer copies of Windows?

When Microsoft eliminates jobs and produces fewer copies of Windows, TFC ____________ and TVC ____________.

Wrong! - Total fixed cost is the cost of Microsoft’s fixed factors. Does TFC change when Microsoft produces fewer copies of Windows or when jobs are eliminated? Total variable cost is the cost of Microsoft’s variable factors, which includes the cost of labor. When Microsoft produces fewer copies of Windows and eliminates jobs, does TVC change?

Correct! - Total fixed cost is the cost of Microsoft’s fixed factors. TFC doesn’t change when Microsoft produces fewer copies of Windows or when jobs are eliminated. Total variable cost is the cost of Microsoft’s variable factors, which includes the cost of labor. When Microsoft produces fewer copies of Windows and eliminates jobs, TVC

Suppose that before Microsoft decreases production of Windows and eliminates jobs, it is producing at minimum ATC. What is the initial effect on AVC, AFC, and MC of a decrease in production?

AVC ____________, AFC ____________, and MC ____________.

Wrong! - With the decrease in production, total fixed cost is spread over a smaller output. Does AFC decrease or increase? As Microsoft decreases production of Windows, MC is less than ATC and greater than AVC. With MC greater than AVC, does AVC increase or decrease as production decreases? How does MC change?

Well Done! - As Microsoft decreases production of Windows, MC is less than ATC and greater than With MC greater than AVC, AVC and MC decrease as production decreases. And with the decrease in production, total fixed cost is spread over a smaller output, so AFC increases.

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