Total Revenue $3,000 Per Week Total Variable Cost $2,000 Per Week Total Fixed Cost $2,000 Per Week Let us suppose Harry's, a local supplier of chili and pizza, has the revenue and cost structure shown here.
A) Harry's should stay open in the long run.
B) Harry's should shut down in the short run.
C) Harry's should stay open in the short run.
D) Harry's should shut down in the short run but reopen in the long run.

Question

Quizplus · Accepted Answer

To determine whether Harry's should stay open or shut down, we need to look at its profit or loss.

Total revenue = $3,000 per week 
Total variable cost = $2,000 per week

So, total contribution margin (total revenue - total variable cost) = $1,000 per week

Total fixed cost = $2,000 per week

So, Harry's total loss = total contribution margin - total fixed cost = $1,000 - $2,000 = -$1,000

Since Harry's is making a loss, it might seem like shutting down is the best option. However, the question asks about Harry's options in the short run. In the short run, it may not be possible or practical for Harry's to shut down completely. Therefore, the best option for Harry's is to stay open in the short run, hoping that the loss will decline or turn into a profit in the long run.