Scenario 9.2
Consider a publicly held firm (one whose stock shares are traded on the stock exchange) that earned revenue worth $350 million and incurred land, labor, and debt costs worth $320 million. The stockholders who have invested a total of $100 million in this firm could have earned 10 percent return on other comparable investments.
-When a firm incurs negative economic profit, it should:
A)hire more laborers to make the business activity profitable.
B)transfer the resources from its current use to other alternative uses.
C)purchase additional raw materials to produce more output.
D)transfer additional resources from other alternative uses to the current activity.
E)continue to operate with the same resources.

Question

Quizplus · Accepted Answer

A firm that incurs negative economic profit is not generating enough profits to provide a return on the resources used in the activity. In such a situation, the best option is to transfer the resources from their current use to other alternative uses that can provide a positive economic return. This option is also known as "exit" in the economic terminology. Continuing to operate with the same resources or hiring more laborers or purchasing additional raw materials will not help the firm to become profitable as the cost of these resources may exceed the revenue generated by the activity. Therefore, the best option for the firm is to exit the activity and invest in other profitable opportunities.

Scenario 9.2 Consider a Publicly Held Firm (One Whose Stock Shares Are