Question

(a) Why would a firm that incurs losses choose to produce rather than shut down?

(b) T Total profit is maximum at the same output at which contribution to profit is maximum.
1 - true
2 - false
(c) If one firm in a competitive industry discovered a cheaper manufacturing process for its product, it could lower its prices, steal competitors' customers, and be better off.
1 - true
2 - false
(d) In the short run, a firm will shut down if its total revenue fails to exceed its fixed costs.
1 - true
2 - false
(e)In the short run, firms choose output level to minimize their short-run average costs.
1 - true
2 - false
(f) (a) What is the difference between a firm's shutdown of operations and its exit from the industry?
f(b) What must happen to the market price to make a competitive firm shut down its operations?
f(c) What must happen to the market price to make a firm exit from the industry?

Answer 1

(a) A firm that incurs losses may choose to produce rather than shut down if the revenue from production covers variable costs, contributing to at least a portion of fixed costs. This decision is based on minimizing losses in the short run.

(b) False

(c) True

(d) True

(e) True

(f)

(a) Shutdown refers to a temporary cessation of operations, while exit involves permanently leaving the industry.

(b) The market price must fall below the firm's average variable cost for a competitive firm to shut down its operations.

(c) The market price must be consistently below the firm's average total cost for it to exit the industry.

Step-by-step explanation:

(a) Firms incurring losses may continue production if their revenue covers variable costs, contributing to some fixed costs. This choice minimizes losses in the short run, allowing the firm to cover at least a portion of its fixed costs.

(b) The statement is false because total profit is maximized where marginal cost equals marginal revenue, not necessarily where contribution to profit is maximum. Maximizing contribution to profit does not guarantee maximum total profit.

(c) True, as a firm with a cheaper manufacturing process can lower prices, attract more customers, and improve its position in the market, potentially leading to better overall outcomes.

(d) In the short run, a firm will shut down if total revenue fails to cover variable costs since fixed costs are sunk in the short run.

(e) True, as firms aim to minimize short-run average costs by choosing the output level where marginal cost equals marginal revenue.

(f)

(a) Shutdown involves a temporary halt in operations, while exit implies leaving the industry permanently.

(b) A competitive firm will shut down if the market price falls below its average variable cost, covering variable costs but not fixed costs.

(c) For a firm to exit the industry, the market price must persistently remain below its average total cost, making it unsustainable for the long term.