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Suppose a firm is currently maximizing profit by producing 100 units of output per day. It is then discovered that the firm owes $1,000 for a one-time tax violation that occurred a few years ago. The firm now needs to pay the $1,000 to the government no matter what. How should the firm react to this additional cost? The firm should increase output in order to increase revenue enough to cover the additional cost. The firm should continue to produce 100 units of output per day, as the $1,000 is a sunk cost and therefore has no effect on production decisions. O The firm should shut down in the short run and start back up in the long run. O The firm should decrease output in order to decrease variable costs by $1,000.

Suppose a firm is currently maximizing profit by producing 100 units of output per day. It is then discovered that the firm owes $1,000 for a one-time tax violation that occurred a few years ago. The firm now needs to pay the $1,000 to the government no matter what. How should the firm react to this additional cost? The firm should increase output in order to increase revenue enough to cover the additional cost. The firm should continue to produce 100 units of output per day, as the $1,000 is a sunk cost and therefore has no effect on production decisions. O The firm should shut down in the short run and start back up in the long run. O The firm should decrease output in order to decrease variable costs by $1,000.

Managerial Economics: A Problem Solving Approach
Managerial Economics: A Problem Solving Approach
5th Edition
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Chapter4: Extent (how Much) Decisions
Section: Chapter Questions
Problem 4.6IP
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Suppose a firm is currently maximizing profit by producing 100 units of output per day. It is then discovered that the firm owes $1,000 for a one-time tax violation that occurred a few years ago. The firm now needs to pay the $1,000 to the government no matter what. How should the firm react to this additional cost? The firm should increase output in order to increase revenue enough to cover the additional cost. The firm should continue to produce 100 units of output per day, as the $1,000 is a sunk cost and therefore has no effect on production decisions. The firm should shut down in the short run and start back up in the long run. The firm should decrease output in order to decrease variable costs by $1,000.
Transcribed Image Text:Suppose a firm is currently maximizing profit by producing 100 units of output per day. It is then discovered that the firm owes $1,000 for a one-time tax violation that occurred a few years ago. The firm now needs to pay the $1,000 to the government no matter what. How should the firm react to this additional cost? The firm should increase output in order to increase revenue enough to cover the additional cost. The firm should continue to produce 100 units of output per day, as the $1,000 is a sunk cost and therefore has no effect on production decisions. The firm should shut down in the short run and start back up in the long run. The firm should decrease output in order to decrease variable costs by $1,000.
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