Homer's Holesome Donuts has determined that its profit-maximizing quantity is 10,000 donuts per year. Homer's earns $12,000 in revenue from the sale of those donuts. Homer's has two costs. First he pays $16,000 in annual rental payments for its five-year lease on its store. Second Homer incurs an additional cost of $5,000 for ingredients. Should Homer's exit the market in the long run?

Question

Quizplus · Accepted Answer

Homer's is incurring an economic loss since its revenue of $12,000 is less than its total costs of $21,000 ($16,000 rental payments + $5,000 ingredients). Therefore, Homer's should exit the market in the long run.

Homer's Holesome Donuts Has Determined That Its Profit-Maximizing Quantity Is