Question

1. If price is higher than ATC then profits are: negative, positive, normal?

a. If this high price prevails then companies start to exit, enter or neither?

b. If price equals ATC then profits are: negative, positive, normal?

2. If this equal price prevails then companies start to exit, enter or neither?

a. If price is less than ATC then profits are: negative, positive, normal?

b. If this low price prevails then companies start to exit, enter or neither?

3. If price is less than AVC then profits are: negative, positive, normal?

a. With this lower than AVC price, companies operate or shut-down?

b. If producing output with a lower than AVC price, loss will be greater/less than/equal to FC?. Why?

Answer 1

1) When the price is higher than ATC then the firm is making positive profits

a)if this price prevails then new firms will enter the market because of positive profits

b) when the price is equal to ATC then the firms will make zero profits as total revenue = total cost

2) if this price prevails then the firm will neither enter nor exit the market as the profits are zero

a) if the price is less than ATC then the firm is making negative profits(loss)

b) if this price prevails then the firm will start to exit the market

3) if the price is less than AVC then the profits are negative

a) The companies will shut down when the price is below AVC as they are unable to cover their variable costs

b) when the firm is producing output if the price is less than AVC then the losses will be greater than the FC because the firm make losses equal to its fixed cost+equal to variable cost for which price is less than AVC

if the firm shuts down,it will only make losses equal to its fixed cost only.