Question

Alexia cleans houses for a living. She considers her little firm, perfectly competitive. She charges $50 per house and it takes her about 4 hours to clean a house. She can clean two houses per day. Her total cost each day, both fixed and variable, including consumable cleaners, supplies, gas for her car, and other expenses are $110. Of this $110, she considers $40 to be fixed cost. In the short run, should Alexia shut down? In the long run, should Alexia exit?

Answer 1

In the short run, should Alexia shut down?

No, it will continue to produce at losses lower than the fixed cost

In the long run, should Alexia exit?

Yes, as the TR>TC.

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total revenue =P*Q=50*2=100

Total cost =$110

fixed cost =40 and variable cost =110-40=70

the firm produces in the short run to reduce the loss as the revenue is above varible cost if it shut downt the loss is equal to fixed cost.

In the long run, the firm exits the market as the revenue is lower than the total cost.