Question

Michael started a business that makes and sells custom made sweaters for dogs. When he opened up his shop, he paid a one-time licensing fee of $2,500. His only cash costs are the $1,000 he spends per month on rent (including utilities) and $2,500 he spends per month on the materials that he needs to make the sweaters. His total revenue in his first month was $4,500. His sister Carly advises him that he is losing money and should shut down. a. (3 points) As an economics guru, what would you advise him to do? b. (3 points) Are there any other costs that he should take into account? Explain.

Answer 1

Solution

one-time licensing fee (fixed cost )= $2,500

rent(variable cost) =$1000

material cost (variable cost )=$ 2500

Total variable = $3500(2500+1000)

Total revenue=$4500

A firm will be shut down if the variable cost is lower than the total revenue

but here Total revenue is greater than total variable cost  so Michael should not shut down

(b) Production contain labour and capital cost also beside upper mention cost so Michael should include labour and capital cost.