Author Question: Suppose that a firm is currently earning revenues that are smaller than its total costs. The firm's ... (Read 129 times)

mp14 · **on:** Jun 29, 2018

Suppose that a firm is currently earning revenues that are smaller than its total costs. The firm's managers are trying to decide whether or not the firm should shut down in the short run.

On what information should the manager's decision be based?

Question 2

When the actual inflation rate turns out to be greater than the expected inflation rate, who gains the borrower or the lender and who loses? Explain why.

What will be an ideal response?

jamesnevil303 · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

The firm's decision should be solely based on whether its revenues from operating are sufficient to cover its variable costs. If they are, the firm should operate.

Answer to Question 2

The borrower gains because he pays back the loan in cheaper dollars dollars that have lost more purchasing power than was expected. The lender loses because she receives dollars that have lost more purchasing power than was expected.