Distinguish between shutdown and exit. When does a profit-maximizing competitive firm decide to shut down? When...

Distinguish between shutdown and exit. When does a profit-maximizing competitive firm decide to shut down? When does it decide to exit a market? Explain your answer.

Expert Solution

When a profit-maximizing firm shuts down, it means that the firm will temporarily stop production and when a firm permanently decides to shut down its operations, it is called exit.

There are two types of cost for a firm - Fixed cost ( Plant, equipment, etc. and variable cost.

Fixed cost can not be changed in the shortrun whereas variable cost can be changed according to the needs of the firm.

The firm decides to exit the market in the long run when its ATC ( Average Total Cost ) is more than the fixed cost because no firm would be ready to remain in the business with more losses in a competitive eonomy.

Rahul Sunny answered 9 months ago

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