Question

1.      When do firms decide to shut down production in the short run? Explain it.

 

2.      How is the short run average cost curve and the long run average cost curve shaped? What is the difference between them?

Answer 1

 

1.       

In the short term, companies often have to impose a specific cost and be independent of production so that it is paid in the worst cases, this is in addition to the marginal revenues that depend directly on production, along with the increase in production because this of course will increase the cost, and this is because the company It is a group of inputs that are made after tax. In the end, the company will benefit from this situation in the event that the total cost of production is less than the company's income.

In the short term, the firm will not close if sales exceed total variable costs. due to the fact that it would produce the same level of production as before.

But if the company suffers a loss (in the case if the return is less than the total cost of the product or in the case if the price is less than the cost of one unit), and the company is unable to cover its changing costs here, the company must close down.

In short, the company must close if the market price is less than the average variable cost when the quantity of production at which the highest profit is achieved, in the short run.

 

2.       

Theoretical approaches include both the basic aggregate supply and long-run average cost curves, and this in any output device.

The U-shape indicates that it is present in the AC curve in the negatively sloping part, so the supply beats increase in cost incrementally, we see that the firm is also facing higher returns to scale.

If the firm is facing record returns at the basic level and continuously, this means that any change in both production and cost will be equal.

Whereas if the company is facing record returns, but in a decreasing manner, so that the demand changes less than the cost changes that occur in the AC curve, specifically in the growing part of it up.

The position at all points of the set of SRAC curves is known by the long-run AC curve. This is because LRAC is the outward configuration and the envelope surrounding all SRACs, so the long-run average cost curve is known as the envelope curve.

Therefore, in the long run, it is expected that each factory or company will choose the lowest cost method of production.