Question

The accountants hired by the Brookside Racquet Club have determined total fixed cost to be $75,000, total variable cost to be $130,000, and total revenue to be $145,000. Because of this information, in the short run, the Brookside Racquet Club should

a.	sh ut down.
b.	exit the industry.
c.	stay open because shutting down would be more expensive.
d.	stay open because the firm is making an economic profit.

Answer 1

In this question the appropriate answer should be OPTION C-stay open because shutting down would be more expensive.

It cannot be option one. Shut down point is that where the variable cost is equal to the total revenue. But here the total revenue is more than the variable cost.

It cannot be option two. If the firm exit the industry, there will not be any revenue and variable cost but the total fixed cost will a loss. Hence, the firm should continue to produce.

It cannot be option four. There is not at all any economic profit. Rather there is an economic loss of 60000.

Hence, the answer will be option three. He should stay open because shutting down would be more expensive.