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.
a. First, calculate each winemaker's profit.
b. Which of these women, if any, earned a profit?
c. Who should stay in business in the short run? Who should shut down?
d. Fill in the blank: Even if profit is negative, if revenues are variable costs, then it's best to stay open in the short run.
e. For which of these wineries, if any, is P > AC? You don't need to calculate any new numbers to answer this.