Question

a. A firm suffers an economic loss of $500,000 per period. The fixed cost is $750,000....

a. A firm suffers an economic loss of $500,000 per period. The fixed cost is $750,000. Should the firm keep producing or should it shut down in the short run? In the long run, should the firm stay in the market or exit?

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Answer #1

Should the firm keep producing or should it shut down in the short run?

Keep producing.

Because when it will shutdown, it loss will be equal to 7,50,00.if it produce it can save 2,50,000.

Fixed cost doesn't changes with output. So even firm will shutdown, ut will have to pay its fixed cost. So better is to remain open to minimise losses.

In the long run, should the firm stay in the market or exit?

Exit.

Explanation :

In long run there is no fixed cost. All cost are variable. So if we are still making loss of 5,00,000. If we will exit our loss will be zero. Because now we don't have to pay fixed cost.

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