Question

1. Is it ever possible for a firm to have a negative accounting profit at the same time it is experiencing a positive economic profit? Explain.

2. Why is it often wise for a struggling firm in a “perfect competition market structure” to continue operations if the price it receives for its product is only slightly above the shutdown point?

3. Why are firms that operate under the “perfect competition market structure” considered to be price takers?

4. When business firms are able to control their basic costs, is success assured? Why or why not?

5. What are some of the basic reasons why some firms can enjoy economies of scale?

Answer 1

1) Accounting Profit - Implicit Costs = Economic Profit

Take Economic Profit as 100 and Implicit cost as -150. Then accounting cost id -50. So yes even if there is positive economic profit, accounting profit can be negative.

2) It is often saying that firm should operate even if they are operating just above the shutdown price (AR = AVC) because in long run every firm operates at zero economic profit due to no barriers of entry/exit in the market. Everyday new entrants comes into the market after observing profits into a specific product and taken the profit below such that it is just covering the cost in long run.

3) In perfect competition we have no barriers for entry/exit of new firms in the market. New firms produce products which are not in any way different from the existing products in the market, thus they have to take the price from the market and start selling the product which is the reason that they are the price taker not the price maker.

4) Success can never be assured as business conditions changes in seconds. A established brand can fall and forced to close due to huge debts if market conditions changes. Basic cost of a firm are wages of labor, machinery, rent of building etc. These cost can be under control if demand of goods produced is neither in deficit nor in surplus but success in market depends upon many factors.

5) Reasons of enjoying economies of scale:

• Newly established firm which have new updated and technological advanced machines which can produce more of the goods with less input deposited.
• Big established brands can buy the raw material of products in cheaper rates due to quantity bought.
• The capacity to invest capital to launch new product in the market.
• Efficient workers which have the deep knowledge of the work which needs to be done.