Volkswagen to Cut Jobs and Close Factories

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

How have Chinese automakers influenced the market for Volkswagen cars?

a) Supply of Volkswagen cars has increased.

b) Demand for Volkswagen cars has decreased.

c) Demand for Volkswagen cars has increased.

d) Supply of Volkswagen cars has decreased.

Wrong! - Long run is a period in which quantity of capital is fixed. Competition from Chinese automakers decreases demand for Volkswagen cars.

That's Right! - At every price, fewer Volkswagen cars are demanded, so the demand has decreased.

How has increased competition from Chinese automakers influenced Volkswagen’s profit-maximizing quantity of output?

The demand and marginal revenue curve have shifted _________, so the marginal cost curve intersects the marginal revenue curve at a _________ quantity of output.

a) leftward; lower

b) leftward; higher

c) rightward; higher

d) rightward; lower

Wrong! - Competition decreases demand and marginal revenue, so MR = MC occurs at a lower quantity.

Well Done! - A leftward shift in demand shifts marginal revenue leftward, so MR = MC at a lower quantity.

Why has Volkswagen chosen to close four plants?

Volkswagen won’t continue with 111 plants because the ________ fixed cost would be spread over _________, raising average total cost.

a) same; lower output

b) lower; higher output

c) same; higher output

d) higher; lower output

Wrong! - The new profit-maximizing output is lower, not higher. Fixed cost is the same, not higher, if Volkswagen continues operating with 111 plants.

Good Job! - Continuing with the same plant size keeps the fixed cost same, but the profit-maximizing quantity has decreased, so average total cost increases.

How would Volkswagen’s costs change if it chooses to operate with 107 plants?

a) Fixed cost, variable cost, and total cost decrease.

b) Variable cost decreases but fixed cost and total cost increase.

c) Fixed cost decreases but variable cost and total cost increase.

d) Fixed cost, variable cost, and total cost increase.

Wrong! - Both fixed and variable costs decrease, so total cost decreases.

Correct! - Closing plants lowers fixed cost, laying off workers lowers variable cost, so total cost decreases.

Is Volkswagen’s decision to close plants and lay off workers correct?

_________, because Volkswagen produces the new profit-maximizing quantity at a ________ average total cost using 107 plants rather than 111 plants.

a) No; lower

b) Yes; higher

c) Yes; lower

d) No; higher

Wrong! - In the long run, a firm chooses the plant size that produces a given level of output at the lowest average total cost.

Great Work! - Total cost is lower with 107 plants than with 111 plants, so Volkswagen would produce the new profit-maximizing quantity at a lower average total cost using 107 plants.

Has Volkswagen made a short-run decision or a long-run decision by announcing the closure of plants and layoffs of workers?

Volkswagen has made a ___________ decision because ____________.

a) short-run; quantity of capital can change only in the short run.

b) long-run; quantity of capital can change only in the long run.

c) short-run; quantity of labor can change only in the short run.

d) long-run; quantity of labor can change only in the long run.

Wrong! - The quantity of capital is fixed in the short run. The quantity of labor can change in both the short run and the long run.

Perfect! - The quantity of capital, in this case number of plants, can change only in the long run.

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