Question

Despite the millionaire resources allocated to support micro, small and medium-sized companies by the Ministry of Economy (SE), 78.6 percent of the benefited businesses leave the market in less than 37 months, warned the Superior Audit of the Federation (ASF)
a. The exit from the market of these companies is due to the fact that in the long term the price is lower than the average total cost (T / F)
b. On the other hand, in the short term when these companies leave the market they cause the supply curve to shift to the (left / right) causing the equilibrium price (to increase / decrease / stay the same) and the quantity supplied (to increase / decrease / stay the same)

Answer 1

Despite the millionaire of resources were allocated to Micro, Small and Medium-sized businesses by the Ministry of Economy (SE), it is clearly observed that 78.6% of the businesses even though they're benefitted but leave the market in less than 37 months, as warned by the Superior Audit of the Federation (ASF).

Ans (a) No, a profit-maximizing business should never continue operating and producing if the price of their goods in the market decline below its Average Total Cost of production and hence, profits are negative. But the given above statement is a case that usually happens in the short-run. But in the long-run, say, in a market like of Perfect Competion, because of the procedure of entry and exit in the market, the price of the goods in the market remains equal to the minimum of curve depicting long-run Average Total Cost. And hence, goods are produced and sold only at a very minimum and lowest possible Average Total Cost. So, the given statement (a) is False, as the main reason behind the benefitted companies exiting from the markets is that price of the goods is lower than its Average Total Cost in the short-run (or say, short-term).

Refer an exact answer of point (a) to the Diagram given below in order to gain more clarity and undertanding of the concept of condition of Shutdown in the short-run, wherein, when Price is less than the Average Total Cost and hence, earning negative profits, due to which firms tend to exit from the market.

Ans (b) On the other hand, in the short-run when the benefitted companies leave the market, they cause the supply curve to shift to the left, and as the producers would now not be ready to sell the same quantity at initial given price (and as the stock of supply would tend to fall suddenly), it would cause the equilibrium price to increase because of decrease in the quantity supplied.