Should a perfectly competitive firm making a loss in the short-run always leave
ID: 1107989 • Letter: S
Question
Should a perfectly competitive firm making a loss in the short-run always leave the market? Why or why not? What about in the long-run? *original answer*Should a perfectly competitive firm making a loss in the short-run always leave the market? Why or why not? What about in the long-run? *original answer*
Should a perfectly competitive firm making a loss in the short-run always leave the market? Why or why not? What about in the long-run? *original answer*
Should a perfectly competitive firm making a loss in the short-run always leave the market? Why or why not? What about in the long-run? *original answer*
Explanation / Answer
No, a perfectly competitive firm making a loss in the short-run should not always leave the market. It should continue production as long as price of the product is more than Average Variable Cost (AVC). If the firm leaves the market in this situation, the loss amount would be total fixed cost. Therefore, as long as price is above the AVC, the firm should continue production. And if price falls below the AVC, it should leave the market. Otherwise, the loss amount would be TFC plus TVC.
But in the long run, there is no fixed cost. So, if the firm is making a loss in the long-run should always leave the market.
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