Frank owns a soda fountain and sells milkshakes. he sells 50 milkshakes per day for $5 each. his daily total cost is $290, of which $30 is fixed cost. What can you say about Franks short run decision regarding shut down and long run decision regarding exit?
To analyze Frank's short run decision regarding shutdown and long run decision regarding exit, we need to consider his revenue and costs.
In the short run, Frank's total revenue depends on the number of milkshakes he sells, which is given as 50 milkshakes per day for $5 each. So, his daily total revenue is 50 milkshakes * $5 = $250.
Frank's total cost includes both fixed costs and variable costs. Given that his fixed cost is $30, his variable cost can be calculated by subtracting the fixed cost from the total cost: $290 - $30 = $260.
In the short run, Frank should compare his total revenue with his variable cost to make a decision about shutting down. If his total revenue is greater than his variable cost, it means that his sales are covering the variable costs of producing milkshakes, and he should continue operating. In this case, $250 > $260, so Frank's total revenue does not cover his variable costs. Therefore, he should consider shutting down in the short run. However, this decision does not consider the fixed costs, which have already been incurred and cannot be avoided in the short run.
In the long run, Frank needs to consider both fixed and variable costs to make a decision about exiting the business. In this case, since his fixed costs are $30 per day, if his total revenue is less than his total cost (including fixed and variable costs), it means that he is not able to cover all his costs and is experiencing a loss. If Frank consistently faces losses in the long run, it might be prudent for him to consider exiting the business to avoid further financial losses.
To summarize, Frank should take a short run decision to shut down if his total revenue is less than his variable costs. In the long run, if his total revenue is consistently less than his total costs, including fixed and variable costs, he should consider exiting the business.