Based on the graph below answer the following questions: Is this firm making pos
ID: 1224109 • Letter: B
Question
Based on the graph below answer the following questions:
Is this firm making positive, negative or zero economic profit? ________________________________
In the short run would such a firm stay open or shut down? __________________________________
In the long run would firms in this market enter, exit or neither? _______________________________
Match firms long run behavior with the effects on the market.
Price increases: A or B or C
Price decreases: A or B or C
Profits increase: A or B or C
Profits decrease: A or B or C
No change in price: A or B or C
No change in profits: A or B or C
A: Firms exit the market
B: Firms enter the market
C: Firms neither exit nor enter
MC ATC VC Output (g)Explanation / Answer
Answer to blank 1: Negative profit
Explanation: Because ATC curve is above the AR curve.
Answer to blank 2: Stay
Explanation: Because AR is sufficient to cover AVC.
Answer to blank 3: exit
Explanation: Because of the negative economic profit(Loss).
Price increases: C
Price decreases: C
Explanation:
The market is in long-run equilibrium, where all firms earn zero economic profits producing the output level where P = MR = MC and P = AC. No firm has the incentive to enter or leave the market. Suppose the market price goes up, the existing firms in the industry are now facing a higher price than before, so they will increase production to the new output level where P = MR = MC. Similarly, when the price decreases,they will decrease production to the new output level where P = MR = MC.
Therefore, Firms neither exit nor enter
Profits increase: B
Profits decrease: C
Explanation: Positive profit will attract new firms and negative profit will lead to exit of existing firms.
No change in price: C
No change in profits: C
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