Question

1. Shut down versus exit prices in the short and long run Aa Aa The graph below represents the marginal cost (MC), average expenditure (AE), and average cost (AC) curves for a firm when it has committed to 150 units of capital. Suppose the market price of output is given by P on the vertical axis and that the firm is a price-taker. Use the black point (X symbol) to represent the short-run (SR) profit-maximizing level of output, then use the red rectangle (cross symbols) to shade the area representing the firm's total revenue, and the orange rectangle (square symbols) to shade the area representing the fixed expense. DOLLARS SR Output/Price Total Revenue MC (k=150) AE (K=150) AC 150 Fixed Expense OUTPUT Help Clear All

For the first drop down "Based on what you know of the relationship between short-run and long-run costs, the firm's long run average cost curve will look most like (LRAC1 /OR/ LRAC2) on the graph below"

For the last part Short Run / Long Run

Economic Profit Positive / negative OR zero

Action Produce Exit OR Shutdown

Thank you!!

Answer 1

In the long run, the firm can vary its input , thus long run cost actually refers to the cost of production of the firm with variable factors of production. Following the relationship between short run and long run cost , long run Average cost should be tangent with the short run average cost . Every point on Long Run average cost curve is the tangent point of a short run average cost curve. Thus here , firm's long run average cost curve must look like LRAC2.

• 	short run	Long Run
  Economic Profit	Positive	Zero
  Action	Produce	produce

in a perfect competitive economy, short run profit maximizing condition is p=mc and Marginal Cost should be greater than Marginal Revenue when mc cut below the mr.

in the long run , firm goes for zero profit equilibrium thus here also the firm will have zero profit.