Question

This activity will demonstrate the concepts of long-run expansion, no expansion but continue to operate, and shut down immediately.

For cases A through F in the following table, would you (1) operate or shut down in the short run and (2) expand your plant or exit the industry in the long run?

	A	B	C	D	E	F
Total revenue	2,500	1,000	4,000	4,400	3,000	6,000
Total cost	2,500	500	5,000	4,500	5,000	5,000
Total fixed cost	500	100	1,250	300	1,250	1,250

Answer 1

A: Oprate in the short run (Because firm is earning zero economic profit,i.e. 2500 - 2500 = 0)

B: Oprate in the short run and expand the plant in the long run. (Because firm is earning positive economic profit,i.e. 1000 - 500 = 500)

C: Oprate in the short run and exit the industry in the long run .

Explanation:

Because in the short run the firm is making loss but its Total revenue is greater than total variable cost, i.e. 3750. So, in the short run it can continue production but it will exit the industry in the long run.

D: Oprate in the short run and exit the industry in the long run.  

E: shut down in the short run and exit the industry in the long run.

Explanation:

Because here TR is less than TVC, i.e. 3750. So, firm will shut down in the short run

F: Oprate in the short run and expand the plant in the long run. (Because firm is earning positive economic profit,i.e. 6000 - 5000 = 1000)