Question

Suppose the price of MOP did not decrease enough to persuade Yasukichi Murakami (who had already leased a lugger in 1914 before the war broke out) to stop operating his lugger. Yasukichi Murakami chose to continue to operate because his _____.

A. total revenue exceeded his total fixed cost
B. total revenue exceeded his total variable cost
C. total revenue exceeded his total cost
D. total revenue was positive

Answer 1

Yasukichi Murakami chose to continue operating his lugger because his total revenue exceeded his total variable costs, which suggests that he could cover costs that vary with production and limit losses to fixed costs.

Step-by-step explanation:

The reason Yasukichi Murakami chose to continue to operate his lugger, despite not enough decrease in the price of MOP, would be because his total revenue exceeded his total variable cost. In a business decision-making process, especially in the short run, a firm should continue to operate as long as it is able to cover its variable costs with the revenue generated from production. This indicates that the firm can cover the costs that vary with production, limiting losses to the fixed costs which are often sunk costs. In Murakami's case, his revenue must be high enough to cover variable costs and contribute to fixed costs, which would justify continuing the operation in the short term.

In the short run, if price is below the minimum average variable cost, a firm must shut down. However, if the revenue is able to cover variable costs and reduce overall losses, it can be prudent to continue operations until the fixed costs (such as leases or contracts) expire, after which the firm can reassess its long-term viability.