Question

1. How does a firm decide whether to shut down production in the short run and in the long run? Explain both scenarios
2. Can a competitive firm earn positive profits in the long run? Explain.

Answer 1

1) Shut down rule decide about when should the production shut down.when we are talking about short run then a firm that is operating at a loss must decide to operate shut down .If in short rub price exceed average variable cost then firm can continue to operate.

The decision is based upon comparision of total revenue to the total variable cost.if revenue is greater then variable cost then the firm is covering its variable cost and there is additional revenue ti cover fixed cost.if variable cost is greater then revenue then firm is not even covering production cost.then it should be shut down.

While in long run a firm cannot incur losses indefinitely which impact long run decisiond.when shut down last for long period then firm has to decide whether to continue to business or leave the industry.

2) A competitive firm earn positive profit in short run but in long run it can earn zero economic profit.because the new entry of firm will drive down economic profits to zero in the long run.a zero economic profit means the firm accounting profit is equal to what its resources could earn in next base.the economic losses lead to firms exiting which will result in  increased demand for the firm and consequently lower losses.competitive firm can make an economic profiy or loss in short run but in long run entry and exit will drive these firm towards a zero economic profit.