2. Explain why firms should not shut down in the short run until price falls bel

Question

2. Explain why firms should not shut down in the short run until price falls below average variable cost. 3. Suppose your economics professor publicly states that she grades on a curve (i.e., the top 10% of the students get an A, the next 20% get a B, the next 40% get a C, the next 20% get a D, and the lowest 10% fail). The whole class could save itself a lot of work by agreeing privately not to study at all for the final exam and just letting the rankings thus far determine the final grades. Why might such an agreement be difficult to maintain and enforce? Which market structure, if any, is this situation most analogous to?

Explanation / Answer

It is very difficult to do so because even if one guy breaches the agreement and answers at least one question, then he will be the top student who gets A grade. So everyone is apprehensive that the other person might breach the agreement. THis is similar to Oligopoly market structure. They always agree that they will sell at a pre-determined and all agreed price. But see what Saudi is doing these days. It is selling the crude oil at much lower price than the cartel agreed price.

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