ECONOMICS (CBSE/UGC NET)

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ECONOMICS

PROFIT

Question [CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
Shelby is an entrepreneur who has decided to open a small advertising firm. She rents office space at a cost of $25, 000 per year, she has employed an assistant at a salary of $30, 000 per year, and she incurs annual utility and office supply expenses of $20, 000. Her best alternative is to work elsewhere and to earn a salary of $50, 000 per year. How much annual revenue must her firm receive so that Shelby earns zero economic profit?
A
$50, 000
B
$75, 000
C
$100, 000
D
$125, 000
Explanation: 

Detailed explanation-1: -Shelby is an entrepreneur who has decided to open a small advertising firm. She rents office space at a cost of $25, 000 per year, she has employed an assistant at a salary of $30, 000 per year, and she incurs annual utility and office supply expenses of $20, 000.

Detailed explanation-2: -If increasing output reduces the per unit cost, the firm is experiencing economies of scale (which means larger plant sizes have lower average total costs at their respective minimum points) .

Detailed explanation-3: -In the short run, when the output of a firm increases, its average fixed cost decreases. Fixed cost remains same irrespective of number of output produced. So, with increase in output, Fixed cost contribution decreases per unit.

Detailed explanation-4: -Profits are therefore maximized when the firm chooses the level of output where its marginal revenue equals its marginal cost.

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