homers holesome donuts has determined that its profit - maximizing quantity is 10,000 donuts per year…

homers holesome donuts has determined that its profit - maximizing quantity is 10,000 donuts per year. homers earns $12,000 in revenue from the sale of those donuts. homers has two costs. first he pays $16,000 in annual rental payments for its five - year lease on its store. second homer incurs an additional cost of $5,000 for ingredients. should homers exit the market in the long run? no, because he is making an economic profit yes, because all costs are fixed in the long run no, because all costs are variable in the long run yes, because he is incurring an economic loss

homers holesome donuts has determined that its profit - maximizing quantity is 10,000 donuts per year. homers earns $12,000 in revenue from the sale of those donuts. homers has two costs. first he pays $16,000 in annual rental payments for its five - year lease on its store. second homer incurs an additional cost of $5,000 for ingredients. should homers exit the market in the long run? no, because he is making an economic profit yes, because all costs are fixed in the long run no, because all costs are variable in the long run yes, because he is incurring an economic loss

Answer

Brief Explanations:

In the long - run, all costs are variable. A firm exits the market in the long - run if it is incurring an economic loss. Total revenue (TR=$12,000) Total cost (TC=$16,000+$5,000=$21,000) Economic profit (=TR - TC=12000 - 21000=-$9,000) (economic loss) However, in the long - run, the firm will make a decision based on the nature of costs. If a firm can cover its variable costs in the long - run (but here we also know that in the long - run, the firm will adjust all factors of production). But the key long - run cost concept is that all costs are variable. If (P\geq ATC) (in long - run equilibrium (P = ATC) for a competitive firm), a firm will stay. But if we just consider the cost structure conceptually for the long - run decision rule (not calculating price and ATC here as we are given total values). The fact that all costs are variable in the long - run means that the firm will re - evaluate all its cost components. If it were making an economic profit ((TR>TC)), it would stay. If (TR < TC) (economic loss), it would exit. But the option “no, because all costs are variable in the long run” is a correct statement about long - run cost nature. The other options:

  • “no, because he is making an economic profit” is wrong as (TR<TC)
  • “yes, because all costs are fixed in the long run” is wrong because all costs are variable in the long run
  • “yes, because he is incurring an economic loss” is wrong because the long - run decision is based on the ability to cover all (variable, as all are variable in long run) costs. If a firm can adjust its inputs (since all costs are variable) and potentially make (TR\geq TC) (by changing scale etc.), but if we assume no change in revenue and cost structure (a ceteris paribus situation), the correct long - run cost characteristic is that all costs are variable.

Answer:

no, because all costs are variable in the long run