How can a firm stay in business if it makes no economic profit in the long...

How can a firm stay in business if it makes no economic profit in the long run? Explain.

When is it optimal for a firm to shut down? Explain the circumstances and time horizon relating to this decision.

Can you please answer them one by one and write legibly and go step by step please and thank you

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Expert Solution

a) The firm will stay in business even if it is making no economic profit because when it makes no economic profit in the long run, it is still able to recover its total cost which includes its fixed and variable costs.As the fixed costs are regarded as sunk costs, when it is able to recover its total costs, it is considered making a normal profit where total revenue = total costs so it has no incentive to leave the market when it is able to recover all of the costs where the price being charged for goods is = minimum of average costs.

b)IT is optimal for the firm to shut down when the price charged for the goods falls below the minimum average variable cost or is below its shutdown point.The firm will only produce if it is able to recover its variable costs which only matters as the fixed costs are sunk costs.If it is not able to recover the variable costs of running the business such as wages paid to staff then it is better to shut down.

Rahul Sunny answered 1 year ago

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