A firm sells 1,000 units per week Suppose the average variable cost is $25, and the...

A firm sells 1,000 units per week Suppose the average variable cost is $25, and the average cost is $50. In the short run, the break-even price is $ . In the long run, the break-even price is $ . Suppose the firm charges a price of $65 per unit. Use the following table to indicate whether the firm will shut down or continue to produce in the short run and the long run. Time Continue to Produce Shut Down Short Run Long Run

Expert Solution

(1) In short run, Break Even Price = Average Variable Cost.

Therefore, in the short run break even price is $25 per unit.

In long run, Break Even Price = Average Total Cost.

Therefore, in the long run break even price is $50 per unit.

(2) The firm charges a price of $65 per unit, price is higher than average average variable cost it implies firm should produce in the short run. Since, price is also higher than the average total cost it implies firm will earn positive economic profit in the short run.

In the long run there will be entry of new firms in the market (because existing firm earns positive economic profit in the short run) as a result market supply curve will shift to the left and price will also decrease. Firms will enter until price is equal to average total cost. So, in the long run firms should produce.

Rahul Sunny answered 2 years ago

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