Question

Suppose that at a firm's profit-maximizing level of output, its total revenue is $1,250, the total cost of its variable factors of production is $1,000, and its total fixed cost is $500. This firm will ________ in the short run, and will ________ in the long run.

Answer 1

Answer:

The correct answer is: continue operating, exit the market.

Explanation:

The total revenue of a firm is $1,250.  

The variable cost is $1,000.  

The total fixed cost is $500.  

At this level of output, the firm is maximizing profit.  

The total cost here is  

= TFC + TVC  

= $500 + $1,000

= $1,500

The total cost incurred is greater than the total revenue earned. This means that the firm is having losses. The firm will not shut down in the short run as it will operate until the variable cost is being covered.  

But in the long run, the firm will exit the market as it will need to cover all the costs to continue operating.