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phoebe.lou phoebe.lou
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2 months ago
The Short Run Supply Curve and Shutting Down

The table shows the profit-maximizing quantity, variable costs, and fixed costs for two different firms.

Firm 1Firm 2
Quantity1000500
Variable cost$4500​$7500​
Fixed cost$392​$94​
Assume that the market price is $9. In the short run:
Firm 1 will ________ (produce/shut down) with an economic ________ (profit/loss).
Firm 2 will ________ (produce/shut down) with an economic ________ (profit/loss).

▸ produce, loss, produce, loss

▸ produce, profit, shut down, loss

▸ shut down, loss, produce, profit

▸ shut down, loss, shut down, loss
Textbook 

Macroeconomics


Edition: 3rd
Authors:
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wukong81wukong81
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2 months ago
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More solutions for this book are available here
produce, profit, shut down, loss

In the short run, a firm will continue to produce as long as the market price (P) is greater than or equal to the average variable costs (AVC).
AVC = Variable Cost/Quantity
For Firm 1, AVC = 4500/1000 = $4.50. Therefore, Firm 1 will produce.
For Firm 2, AVC = 7500/500 = $15.00. Therefore, Firm 2 will shut down.

If P > Average Total Cost (ATC), the firm will earn an economic profit.
If P = ATC, the firm will break even.
If P < ATC, the firm will experience an economic loss.
ATC = AVC + Average Fixed Cost (AFC).
AFC = Fixed Cost/Quantity
For Firm 1, AFC = 392/1000 = $0.39. Therefore, ATC = AVC + AFC = 4.50 + 0.39 = $4.89 and the firm earns an economic profit.
For Firm 2, AFC = 94/500 = $0.19. Therefore, ATC = AVC + AFC = 15.00 + 0.19 = $15.19 and the firm experiences an economic loss.
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phoebe.lou Author
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