Should the firm shut down in the short-run? Explain in detail why or why not.

Expert Solution

Answer - In the short run, a firm that is operating at a loss (where the revenue is less that the total cost or the price is less than the unit cost) must decide to operate or temporarily shutdown. The shutdown rule states that “in the short run a firm should continue to operate if price exceeds average variable costs.

The short run shutdown point for a competitive firm is the output level at the minimum of the average variable cost curve. Assume that a firm's total cost function is TC = Q3 -5Q2 +60Q +125. Then its variable cost function is Q3 –5Q2 +60Q, and its average variable cost function is (Q3 –5Q2+60Q)/Q= Q2 –5Q + 60. The slope of the average variable cost curve is the derivative of the latter, namely 2Q – 5. Equating this to zero to find the minimum gives Q = 2.5, at which level of output average variable cost is 53.75. Thus if the market price of the product drops below 53.75, the firm will choose to shut down production

Rahul Sunny answered 2 years ago

18. A firm should shut down in the short run if:

18. A firm should shut down in the short run if: a. price is greater than average variable costs b. average fixed costs are greater than marginal revenue c. price is less than average variable costs d. total costs are greater than fixed costs 19. A firm is said to be making profits when: a. marginal revenue exceeds marginal costs. b. marginal revenue exceeds variable costs. c. average revenue exceeds average total...

Explain why a perfectly competitive firm will shut down in the short run if price is...

Explain why a perfectly competitive firm will shut down in the short run if price is lower than average variable cost but will continue to produce if price is below average total cost but above average variable cost. In long-run competitive equilibrium, P = MC = SRATC = LRATC. Because P = MR, we can write the preceding condition as P = MR = MC = SRATC = LRATC. The condition thus consists of four parts: (a) P = MR,...

A profit-maximizing firm in monopolistic competition should shut down in the short run if: a. price...

A profit-maximizing firm in monopolistic competition should shut down in the short run if: a. price is more than average total cost. b. price is less than average variable cost. c. marginal revenue is equal to marginal cost. d. marginal revenue is less than price. e. price is less than average fixed cost. The term “strategy” in terms of game theory refers to: a. the tendency for collusive firms to generate normal profits. b. each firm’s decision to charge a...

In the short run, under what conditions should the firm shut down? average total cost at...

In the short run, under what conditions should the firm shut down? average total cost at the minimum point price greater than average variable cost price less than average variable cost marginal revenue greater than marginal cost marginal revenue greater than average total cost

A profit-maximizing firm should shut down in the short run if: Answer choices: price is greater...

A profit-maximizing firm should shut down in the short run if: Answer choices: price is greater than marginal cost. total revenue is less than total variable cost. the firm is earning less than a normal rate of return. the firm is not able to cover its overhead expenses. marginal cost is higher than average cost.

In the short run, under what conditions should the firm shut down? a. average total cost...

In the short run, under what conditions should the firm shut down? a. average total cost at the minimum point b. price greater than average variable cost c. price less than average variable cost d. marginal revenue greater than marginal cost

In the short run, a perfectly competitive firm will shut down and produce nothing if: a....

In the short run, a perfectly competitive firm will shut down and produce nothing if: a. economic profits equal zero. b. total cost exceeds total revenue. c. total variable cost exceeds total revenue. d. the market price falls below the minimum average total cost.

At a price of $10, and assuming the price doesn't increase in the future, should the firm continue to produce in the short-run or shut down in the short-run?

Quantity Total Revenue Marginal Revenue Total Cost Marginal Cost Fixed Costs ATC Average Fixed Costs Average Variable Costs 0 0 - 10 - 10 - - - 1 8 24 14 24 2 16 34 10 17 3 24 42 8 14 4 32 49 7 12.25 5 40 57 8 11.4 6 48 67 10 11.17 7 56 81 14 11.57 8 64 99 18 12.38 9 72 123 24 13.67 At a price of $10, and assuming the...

How does a firm decide whether to shut down production in the short run and in...

How does a firm decide whether to shut down production in the short run and in the long run? Explain both scenarios Can a competitive firm earn positive profits in the long run? Explain.

1. Explain why perfectly competitive firms have to shut down in both short and long run.

Question