A firm has Total Costs (TC) of $12,000 over the next three months, of which $8,000 are fixed costs (TFC) for rent on its lease that cannot be broken. If it stays in business over those months, then the firm will collect only $6,000 in revenues (TR). So, considering only this information, should they stay in business for those three months, or should they close down right now? Provide your reasoning.
2007-05-17 16:03:57 · 4 answers · asked by Kristin_80 1 in Social Science ➔ Economics
I think "catbarf" was correct but his wording confused me a bit.
Here's the main point you should take away from this: The $8,000 rent is a "SUNK COST." A fixed cost is not always a sunk cost - machinery is fixed but it can be sold (albeit for a depreciated amount). Rent is fixed but it is a sunk cost because the lease cannot be broken. This means you subtract it from the equation because it cannot be recouped and shouldn't affect the decision.
That means that $4,000 of the . Therefore you should stay in business and take the $6000.
2007-05-17 16:24:54 · answer #1 · answered by G_Elisabeth 5 · 0⤊ 0⤋
They should stay in business in the short run (the next 3 months) because they have an addtional amount of revenue (MR of 6000) greater than their additional costs (MC of 4000).
Think of it this way, if they close the doors they will have to pay $8,000 and receive 0 revenue for a loss of $8,000
If they stay open they will have to pay $12,000 and receive revenue of $6,000 for a loss of $6,000. Which would you rather lose $8,000 or $6,000?
2007-05-18 18:48:57 · answer #2 · answered by Kyle 2 · 0⤊ 0⤋
I supposed it depends on what business are they in. Put the rent aside, the other cost (cost of goods) is $4000, and if the business brings in $2000 a month, $6000 in 3 months. I would say, they can stay in business for longer period of time to determine if the business is profitable. Need to find out what those costs are. Maybe the business is new, and they need to invest in advertising for more exposure.
2007-05-17 23:14:30 · answer #3 · answered by buttwiser26 2 · 0⤊ 0⤋
I may be sleeping or something, but the problem is to either spend 12000 to earn 6000 in 3 months, or to spend 8000 now and earn nothing. Staying in business appears to the best of 2 bad situations. Asi es la vida!
2007-05-17 23:15:09 · answer #4 · answered by cattbarf 7 · 0⤊ 0⤋