Question

Paulette, Camille, and Hortense each own wineries in France. They produce inexpensive, mass-market wines. Over the last few years, such wines sold for 7 euros per bottle; but with a global recession, the price has fallen to 5 euros per bottle. Given the information below, let's find out which of these three winemakers (if any) should shut down temporarily until times get better. Remember: Whether or not they shut down, they still have to keep paying fixed costs for at least some time (that's what makes them "fixed”). To keep things simple, let's assume that each winemaker has calculated the optimal quantity to produce if they decide to stay in business; your job is simply to figure out if she should produce that amount or just shut down. Which of these women, if any, earned a profit? Winemaker Fixed Costs Variable Costs Recession Revenues Paulette $50,000 $80,000 $120,000 Camille $100,000 $40,000 $70,000 Hortense $200,000 $250,000 $200,000

(a) Which of these women, if any, earned a profit?

(b) Who should stay in business in the short run?

(c) For which of these wineries, if any, is P > ATC? (Hint: You don’t need to calculate any new numbers to answer this.) (ATC: Average Total Cost, P: Price)

Please answer these questions by also providing explanations and reasons why you answered the way you did it.

Answer 1

(a)

Winemaker	Fixed cost	Variable cost	Recession Revenue	Profit
Paulette	50000	80000	120000	-10000
Camille	100000	40000	70000	-70000
Hortense	200000	250000	200000	-250000

Profit = Revenue - Variable cost - Fixed cost.

All the three womens has negative profit (loss).

hence, none of the women earned a profit.

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(b)

A firm will stay in business in short run if the firm's revenue is higher than variable cost in the short run.

Hence, Paulette and Camille should stay in business in short run.

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(c) None of the wineries has P>ATC because each wineries earned negative economic profit.

Note:

P>ATC implies firm earns economic positive profit

P<ATC implies firm earns negative economic profit (or loss)

P=ATC implies firms earns zero economic profit (or zero economic loss)