Question

For the past nine months, Delores has been producing frozen yogurt out of her small kitchen shop in Detroit. She's been just breaking even (earning zero economic profit) that entire time. This morning, the state Board of Health informed her that they are doubling the annual fee for the food preparation license she operates under, retroactive to the beginning of her operations. Which of the following statements is true?

• In the short run, Delores should increase output; in the long run, she may need to consider exiting the market

• In the short run, Delores should leave output unchanged; in the long run, she may need to consider exiting the market.

• In the short run, Delores should leave the market; in the long run, she may want to return to the market

• In the short run, Delores should decrease output; in the long run, she may need to consider exiting the market

Answer 1

Answer: In the short run, Delores should leave output unchanged; in the long run, she may need to consider exiting the market.

Step-by-step explanation:

The annual fee for the food preparation license that Delores operates under is to be considered a fixed cost. Now the thing about Fixed costs is that they don't change regardless of output. You could produce 59 bags and pay $20 for power or you could produce 10 bags and still pay the $20.

For this reason therefore, Delores should not change output in the short run because she will still have to pay for the annual fee.

In the long run though, if the situation persists, she should consider leaving the business/market because she will be making losses.