Question

which of the following statements is correct regarding a firm’s decision making?

a. shut down and exit are both long run decisions

b. exit is a short run decision and shutdown is a long run decision

c. Shut down is a short run decision and exit is a long run decision

d. shut down and exit are both short run decision

Answer 1

Answer- option c . Shut down is a short run decision and exit is a long run decision.

Shut down is a situation where the firm stops producing output but retains the capital that would allow it to resume production later. A firm stops producing to minimize losses, it is called a shut down situation. It is a short run phenomenon where firm retains the capital but has to decide whether to produce or not to minimize losses. When a firm produces nothing, fixed costs are to be paid in the short run and hence losses are equal to fixed costs. But if price is less than average variable cost, then losses in producing output are fixed costs and variable cost. Hence, losses in case of not producing are less than losses in case of producing and the firm decides to shut down. It retains the capital and may resume production whenever it seems feasible.

Exit is a situation where the firm decides to leave the industry where it is operating and move to other production for profits. It is a long run phenomenon. If the firm is continuously incurring losses, it decides to leave the industry and pursue another production to make profits. Firms can exit in the long run because long run is the time period during which all factors of production can be changed and hence all factors can be removed and exit the industry.

Option a is incorrect because shut down is not a long run decision but a short run decision.

Option b is incorrect because exit is not a short run decision. It is a long run decision as firms can alter their all factors of production in the long run. Hence, firms can exit in the long run and pursue another production process. Shut down is not a long run decision but a short run decision.

Option d is incorrect because exit is not a short run decision. It is a long run decision where firm decides whether to leave the industry or not.