Q1 Yesterday, a perfectly competitive producer of construction bricks manufactur

Question

Q1 Yesterday, a perfectly competitive producer of construction bricks manufactured
and sold 10,000 bricks per week at a market price that was just equal to the
minimum average variable cost of producing each brick. Today, all the firm’s
costs are the same, but the market price of bricks has declined.

(a) Assuming that this firm has positive fixed costs, did the firm earn economic profits, economic losses, or zero economic profits yesterday? Justify your answer.
(5 marks)

(b) As for today, which option would be the best for the firm – to continue producing in this market, or shut down? Explain your reasons.

Explanation / Answer

a. The firm incurred an economics loss, this is because they only met their AVC and not their ATC, which is used to determine if a firm is making economic profit. b. The firm should shut down. If a firm cannot meet its AVC, then it will be better off not producing in the short-run.

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