Suppose that at the current level of output, Pat's Hats has fixed costs of $500, variable costs of $1, 000, and $2, 000 in total revenue.Which of the following is true?
A)Profit is currently $500 and, in the long run, it will be $1, 000 because there will be no fixed costs.
B)Profit is currently $500 and, in the long run, it will be $1, 500 because there will be no variable costs.
C)Profit is currently $500.
D)Profit is currently $500, and Pat's Hats will want to decrease its plant size in the long run to lower its fixed costs.
E)Pat's Hats will continue to operate as long as revenue is greater than $500.

Question

Quizplus · Accepted Answer

Profit is calculated by subtracting total costs (fixed and variable) from total revenue. In this case, Profit = Total Revenue - Total Costs = $2,000 - ($500 + $1,000) = $500. As long as Pat's Hats is making a profit, they will continue to operate. However, there is no information to suggest that Pat's Hats will want to decrease its plant size or that profit will increase in the long run. Therefore, option C is the correct answer.

Suppose That at the Current Level of Output, Pat's Hats