Question

Your firm has a total revenue of $1,000, a total cost of $1,500 and a variable cost of $500. What does this tell us about your profits and whether or not you should operate or shut down

Answer 1

Answer:

Firm should operate.

Explanation:

Here, we are assuming that this is a situation of short run.

A firm will operate or shut down is totally dependent upon whether the firm will be able to cover its variable cost of not. If a firm will be able to cover all of its variable cost then this firm will not shut down and operates in the short run until it covers all of its variable costs.

In this case, given that,

Total revenue = $1,000

Total cost = $1,500

Variable cost = $500

Profits = Total revenue - Total cost

           = $1,000 - $1,500

           = -$500

Therefore, this clearly shows that this firm will be able to cover its variable cost of $500 with the total revenue of $1,000. That's why the firm remains in the market even there is a loss of $500.

Hence, this firm should operate.