Question

Consider the graph below. Suppose that a firm in a competitive market has the cost curves shown in the graph. If the market price falls below $4.50, the firm will earn zero economic profits in the short run and shut down. positive economic profits in the short run. zero economic profits in the short run run but remain in business. negative economic profits in the short run but remain in business. negative economic profits in the short run and shut down.

Answer 1

Ans. e) negative economic profits in the short run and shut down

If the price falls below the $4.50 ( i.e. where P = minAVC, shut-down point), the firm will earn a negative economic profit because of below this price, the firm will not able to earn enough revenue to bear the variable costs in the production process and which leads to shut down the production of the goods.