A Firm Is Experiencing A Loss Of 5000 Per Year When Operatin

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1 A Firm Is Experiencing A Loss Of 5000 Per Year When Operating Th A firm is experiencing a loss of $5,000 per year when operating. The firm has fixed costs of $8,000 per year. The firm is evaluating whether to continue operating in the short run or shut down, and in the long run whether it should exit or stay in the market. In the short run, a firm should continue to operate if it can cover its variable costs and contribute something towards fixed costs; otherwise, it should shut down temporarily. Since the firm is incurring a loss of $5,000 annually but has fixed costs of $8,000, we need to determine the firm's variable costs to advise on operational decisions. If the firm's total revenues are less than its variable costs, then it should shut down immediately. If revenues cover variable costs but not total costs, it should continue operating to minimize losses, as some contribution can offset fixed costs. In the long run, the firm should exit if profits are negative persistently because fixed costs become sunk costs and do not influence the decision to stay or leave, as resources can be reallocated elsewhere. Provided the firm’s annual losses exceed the fixed costs, it indicates that its total revenue is less than total costs, and exit would be optimal in the long run. Answer: a. operate; shut down

Dr. Jack HW Helper · Accepted Answer

The decision-making process of a firm facing losses involves analyzing both short-term and long-term considerations. In the short run, a firm should continue operating if it can cover its variable costs, even if it incurs a loss overall. This ensures that the firm reduces its losses rather than shutting down, which would result in fixed costs still being incurred without any revenue. Conversely, if the firm cannot cover its variable costs, then it should shut down immediately to prevent further losses solely attributable to operating costs. In this scenario, the firm reports an annual operating loss of $5,000 with fixed costs of $8,000. Assuming the firm's total revenue is insufficient to cover fixed costs, the critical analysis hinges on whether the revenue surpasses variable costs. If revenues are below variable costs, shutting down would be the prudent short-term decision to minimize losses. If revenues comfortably exceed variable costs but not total fixed costs, operating can still be beneficial because the firm can offset some fixed costs. In the long run, decisions pivot on the overall profitability. Persistent losses that outweigh fixed costs imply that the firm is operating inefficiently. Since fixed costs are sunk in the long run, the firm should cease operations and exit the market if it cannot achieve profitability, as resources could be better allocated elsewhere. This aligns with the economic principle that in the long run, firms will exit if they cannot cover all their costs, including opportunity costs. Therefore, based on the provided figures, the optimal short-term action is to operate if variable costs are covered and to shut down otherwise. Long-term, the firm should exit the market if losses continue to outweigh fixed costs, rendering its continuation unprofitable. References Krugman, P. R., & Wells, R. (2018). Economics (4th ed.). Worth Publishers. Mankiw, N. G. (2021). Principles of Economics (9th ed.). Cengage Learning. Perloff, J. M. (201

1 A Firm Is Experiencing A Loss Of 5000 Per Year When Operating Th

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