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Economic Profit

  • 22-04-2009 4:50pm
    #1
    Butterz
    Closed Accounts Posts: 16 ✭


    Quick question. Help greatly appreciated

    A profit maximising firm's sales revenue is less than its economic costs.

    a)its makin an economic loss so should shut down straight away
    b)its not makin normal profit but it is makin some profit an should stay open indefinitely
    c)it should stay open in SR if total sales are greater than total variable costs and should close down in long run.
    d) it should stay open as long as sales rev is greater than fixed costs.

    a)? Just want a definite answer.

    Thanks


Comments

  • #2
    Économiste Monétaire
    Closed Accounts Posts: 2,208 ✭✭✭Économiste Monétaire


    C is the correct answer.

    P.q < FC + VC; and P.q > or = VC.


  • #3
    Butterz
    Closed Accounts Posts: 16 ✭Butterz


    Ok.
    I am just wondering WHY the rule of covering VC in short run and TC in long run is the case?
    Because fixed costs are payed regardless?

    In the long run are all costs fixed therefore dont even start?

    Sorry that it seems to be the same person answering all my questions.


    Prob think im a little slow:(


  • #4
    Économiste Monétaire
    Closed Accounts Posts: 2,208 ✭✭✭Économiste Monétaire


    The technical description is that you cover your variable costs in the short-run and make a contribution to fixed costs. You focus on variable costs because they change with quantity, fixed costs do not (they're fixed by definition). You may have heard the adage, "economists think at the margin," well the maximisation problem is one of expanding your marginal benefit (revenue) to equal marginal cost (total variable costs change with q); the MC = MR idea. So for a change in quantity, what is the change in revenue (marginal revenue) and cost (marginal cost)? If you've done any treatment of this with calculus you were probably shown a constant fixed cost, and when your doing the maximisation problem this goes to zero as your differentiate with respect to q.

    Short answer: In the short-run, fixed costs don't affect your MC or MR; MC = MR is the maximisation problem. In the long-run, all factors are variable.


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