Wendy quit her job as a lab technician which paid her $36 000 per year to start

Question

Wendy quit her job as a lab technician which paid her $36 000 per year to start a nursery business. She spent $12 000 of her savings, which had been earning 10% interest per year, on equipment for her business. She also borrowed $12 000 from the bank at 10% interest per year, which she also spent on equipment. For the past several months she has spent $1,000 per month on variable costs. Also, for the past several months she has earned $3,500 in monthly revenue. Based on this information, Wendy should ____ A.  continue operating her nursery in the short run, but exit the nursery industry in the long run B.  shut down her nursery in the short run, and exit the nursery industry in the long run Wendy quit her job as a lab technician which paid her $36 000 per year to start a nursery business. She spent $12 000 of her savings, which had been earning 10% interest per year, on equipment for her business. She also borrowed $12 000 from the bank at 10% interest per year, which she also spent on equipment. For the past several months she has spent $1,000 per month on variable costs. Also, for the past several months she has earned $3,500 in monthly revenue. Based on this information, Wendy should ____ A.  continue operating her nursery in the short run, but exit the nursery industry in the long run B.  shut down her nursery in the short run, and exit the nursery industry in the long run

Explanation / Answer

Wendy purchased equipment worth $24000

($12000 hee savings and $ 12000 loan)

Fixed Cost = $ 24000

Variable Cost = $ 1000 per month

Total Revenue = $ 3500 per month

Here TR > VC

Hence firm must continue operating in the short run.

In the long run, P < ATC

Fixed Cost = $ 25000

Variable Cost = $ 1000

TC = FC + VC = $ 25000

Let us assume Q = 100

ATC = TC/Q

ATC = 25000/100

ATC = 250

TR = 3500

P = TR/Q = 3500/100

P = 35

Price is less than the ATC

P < ATC.

Since price is less than the ATC in the long run hence firm should cease its operation in the Long Run.

Therefore, Wendy must continue to operate in the short run, but exit the nursery industry in the long run.

Option A is correct.

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