Firms in the market for soccer balls are selling in a purely competitive market. A firm...

Firms in the market for soccer balls are selling in a purely competitive market. A firm in the soccer ball market has an output of 1,000 balls, which it sells for $9 each. At the output level of 1,000, the average variable cost is $8, the average total cost is $11.00, and the marginal cost is $9.

1. What would you expect the firm to do in the short run? in the long run?

Solutions

Expert Solution

Ans:

The firm will continue the production in the short run.

The firm will exit from the production in the long run.

Explanation:

Market price = $9

AVC = $8

ATC = $11.00

Total output = 1,000 balls

Total revenue = Price * Quantity = $9 * 1000 = $9000

Total cost = ATC * Quantity = $11.00 * 1000 = $11,000

Profit / Loss = Total revenue - Total cost = $9000 - $11,000 = - $2000 ( loss)

In the above scenario , the firm is making negative economic profit or loss . But the firm will continue its production becuase it is able to recover total variable costs and some parts of fixed costs . Here , P > AVC.

But in the long run , the loss making firm will exit from the market.

Rahul Sunny answered 1 year ago

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