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Author Question: Music.com is earning a total revenue of 100,000 per year. Its annual total fixed costs are 50,000 ... (Read 81 times)

humphriesbr@me.com

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on: Jun 29, 2018
Music.com is earning a total revenue of 100,000 per year. Its annual total fixed costs are 50,000 and its annual total variable costs are 175,000 . What is the operating profit for Music.
 
  com? What is economic profit? Is this firm doing the right thing by continuing to produce in the short run? If conditions don't change what should this firm do in the long run?

Question 2

Books.com is earning a total revenue of 200,000 per year. Its annual total fixed costs are 50,000 and its annual total variable costs are 75,000 . What is the operating profit for Books.com? What is economic profit?
 
  What will be an ideal response?


voltaire123

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Reply #1 on: Jun 29, 2018
Answer to Question 1

Operating profit is revenue minus variable costs (100k - 175k) equals operating profit of -75k. Economic profit is revenue minus total costs (100k - 225k) equals profit of -125k i.e., a loss. This firm should shut down in the short run since it is not minimizing its losses by producing. In the long run this firm should exit the industry.

Answer to Question 2

Operating profit is revenue minus variable costs (200k - 75k) equals operating profit of 125k. Economic profit is revenue minus total costs (200k - 125k) equals economic profit of 75k.


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