Distinction Between Short-Run Shutdown and Long-Run Exit

Short-Run Business Decision Analysis

A coffee shop has monthly fixed costs of $2,000 (rent, insurance). It sells an average of 1,000 cups of coffee per month at a price of $4.00 per cup. The variable cost for each cup of coffee (beans, milk, cup) is $2.50. Given this information, what is the most rational decision for the coffee shop owner in the short term?

Short-Run Production Decision Analysis

A bicycle manufacturer sells each bike for $50. The variable cost to produce one bike is $40. The company has monthly fixed costs of $15,000. Last month, the company produced and sold 1,000 bikes, resulting in a total loss of $5,000. The manager, seeing this loss, decides to temporarily shut down all production for the next month. Evaluate this decision.

A furniture company produces 100 chairs per month. The selling price per chair is $150. The total variable costs for producing 100 chairs are $12,000, and the total fixed costs are $5,000 per month. The company is currently operating at a loss.

Statement: The most financially sound decision for the company in the short term is to cease all production immediately.

Evaluating a Shutdown Decision

A firm in a competitive market is producing at a quantity where its Average Total Cost (ATC) is $20 and its Average Variable Cost (AVC) is $12. Match each of the following potential market prices with the firm's most rational short-run decision.

Short-Run Production Profitability Analysis

A small manufacturing firm has monthly fixed costs of $5,000. When it produces 1,000 units of its product, its total variable costs are $8,000. To minimize its losses in the short run, the firm should continue to operate as long as the market price per unit is at least $____.

A firm finds that for its current level of output, the market price for its product is less than its average total cost, but greater than its average variable cost. From a purely economic standpoint, what is the primary rationale for this firm to continue production in the short run despite incurring a loss?