Econ001-Examstyle-Q3-solution-part3

. (Note: If the firm suffers a loss, enter a negative number in this cell.) Points: 1/1 True or False: This was a wise decision. C roe « % False Points: 1/1 Close Explanation Explanation: Profit is equal to total revenue minus total cost. If the CEO decides to shut down operations, the firm will earn a loss equal to its fixed cost of $100: Profiteraf = Total Revenue~Total CostToal Revenue-Tot it = alCaost $0~Fixed Costso-Fixed Cost ~$100-s5100 If the price of a case of ball bearings is $50, the firm will minimize its loss by producing 4 units. Production beyond this level yields a marginal cost that is greater than the marginal revenue of $50, and production below this level yields a marginal cost that is below marginal revenue. At this quantity of production, profit is ($50 per ball bearingx4 ball bearings)~$240=~ $40550 per ball bearingx4 ball bearings—$240=-%$40. Because a loss of $40 is better than a loss of $100, it was not a wise decision for the CEO to shut down production. See Sections: The Revenue of a Competitive Firm and The Firm’s Short-Run Decision to Shut Down. Vaguely remembering his introductory economics course, the company’'s chief financial officer tells the CEO it is better to produce 1 case of ball bearings, because marginal revenue equals marginal cost at that quantity. At this level of production, the firm's profit is -$100 . (Note: If the firm suffers a loss, enter a negative number in this cell.).