In the short-run the decision varies depending on the level of losses and whether the firm can cover its variable cost. For instance, Vera’s cupcake store is facing a decision based on profit, she has to decide whether to stay open in the old location and produce to cover her variable cost or shutdown the cupcake store and wait till the new locations is open but if she does this she will not make any profit (S., 2013).
So, if Vera’s cupcake store would to operate in her old location and not shut down its profit pi equal total revenue minus its variable cost minus its fixed costs. Let me elaborate with the following:
Profit= TR-TC = 200-300 = -$100
Now, if Vera’s cupcake store would to shut down its profit pi equal total revenue minus its variable cost minus its fixed costs profit pi equal total revenue minus its variable cost minus its fixed costs. Let me elaborate with the following:
Profit= TR-TC = 0-300 = -$300…show more content… But if Vera’s store would shut down that is producing nothing in the short run, she would lose $300, because she still needs to pay her fixed cost anyway. In terms of profitability is preferable to lose only $100 than $300. By charging $4 per cupcake and her marginal cost is $3, she makes $1 extra per cupcake. Therefore, she can make $200 out of the difference between the price of the cupcake and the marginal costs. This amount is almost ¾ parts of her fixed cost, which is $300 for rent. Also, with this amount ($200) she can justify remaining in business and not end up expending more than $100 extra in fixed
