Susan quit her job as a teacher, which paid her $36,000 per year, in order to start her own catering business. She spent $12,000 of her savings, which had been earning 10 percent interest per year, on equipment for her business. She also borrowed $12,000 from her bank at 10 percent interest, which she also spent on equipment. For the past several months she has spent $1,000 per month on ingredients and other variable costs. Also for the past several months she has taken in $3,500 in monthly revenue. In the short run, Susan should

Question

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Susan is currently in a short-run loss since her revenue of $3,500 is less than her total costs of $4,000 ($1,000 variable costs + $2,000 in interest payments on her loans). However, since she has already invested $24,000 in equipment, it would be better for her to continue operating her business in the short run, even at a loss, rather than shutting down and losing her investment. In the long run, however, she may need to consider exiting the industry if she cannot eventually generate profits. Additionally, she may face competition from newly entering firms in the long run.

Susan Quit Her Job as a Teacher, Which Paid Her