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Suppose a perfectly competitive firm in the short-run is currently producing an output level of 50,000 units, charging a price per unit of $4. The firm incurs variable costs of $280,000 in producing this level of output. It also has fixed costs of $60,000.
a) Calculate the economic profit (or loss) from the firm producing and selling these 50,000 units of output.
b) Calculate the economic profit (or loss) from the firm shutting down and producing zero units.
c) Given the correct answers to both a) and b), should this firm maintain production, should it shut down, or should it exit the industry? Why?
d) How would your answer change (if it were to change) if the firm's fixed costs were actually $100,000? Explain.
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