Question

Please explain and answer all questions in microsoft word

1. Using real world examples, discuss the difference between the short run shut down point and the long run going out of business point.

2. .Using real world examples, discuss when firms are likely to enter a market and when firms are likely to exit a market.

Answer 1

1.A profit maximizing firm maximizes its profits where marginal cost equals marginal revenue.A firm will shut down their business when their marginal revenue is lower than their average variable cost which implies that they cannot cover their variable cost of production anymore e.g, salaries of employees.If the firm continues production it will incur more loss.But anyway the firm will have to pay their fixed cost.

Shutting down in short run does not necessarily imply that the firm wil go out of business completely because it can resume its production after market condition improves e.g, production cost has gone down.But exiting the industry means the firm has sold out their capital for a profitable venture.Exit is always a long run decision.If price or marginal revenue is less than long run average cost the firm will exit the industry.

2.Firms will enter a market when supernormal profit is high and will exit when price is less than long run average cost.