Answer to Question #226264 in Economics of Enterprise for Mickyas Tofik

Question

1.     Nib Chocolate Company produces 100,000 chocolate bars, which sell for 4 ETB a bar. Variable costs are 3ETB per bar, and it has 150,000ETB fixed operating costs in the short run. Then, (5 pts)

a)     Should the firm keep producing, as profits are ETB 50,000? Why?

b)     Should the firm shutdown, as fixed costs are not being covered? Why?

c)     Should keep producing as variable costs are being met? Why?

d)    What do you think will be the decision of the firm in the long run? 

Answer 1

a) Nib Chocolate Company should keep producing since the Gross profit is positive at ETB 50,000.

b) The firm should not shutdown just because it is not able to meet its fixed costs, In the short run it is not mandatory that it should shut down since it can buy raw materials and produce. The fixed costs will be covered in the long run when the firm stabilizes.

c) Since the company is able to meet its variable costs, then it should continue producing. In the short run, the firm seeks to first cater the variable costs which is able to.

d) The firm should invest heavily in property, plant and equipment to increase production to be able to cater the fixed costs. Further, the research and development team should engage in doing research to establish where costs can be minimized.