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1. Shut down versus exit prices in the short and long run Aa Aa E The graph below represents the marginal cost (MC), average
Based on what you know of the relationship between short-run and long run-costs, the firms long-run average cost curve will
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Answer #1

DOLLARS SR Output/Price MC k=100) Total Revenue AE Ik=100 Fixed Expense AC (k-1001 OUTPUT Help Clear All

The firm's long-run average cost curve will look most like LRAC1 on the graph.

Economic profit Action Short Run Negative Stay Long Run Negative Exit

As in the short-run, the firm is able to obtain revenue which is equal to the average cost but not the average expenditure, but in the short-run, the firm can stay in the market as P = MR = MC which is not less than the average cost. But in the long-run, the firm can not stay in the market with negative profit and will need normal profit to meet its expenditure.

LRAC1 is because in the long-run AC will still remain less than AE.

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