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5. Assume that the market for cardboard is perfectly competitive. In each of the following scenarios, should a typical firm c
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Answer #1

a ) Ans: The firm should continue to produce.

PRICE IML ATC -AVC $1.75L OSS INTO P=MR=AR ου τρυτ

Explanation:

ATC = $2.00 , AVC = $1.50 , Market Price = $1.75

In this case, firm is making loss but it will not shutdown production because still price is greater than average variable cost ( AVC ).

The shutdown point occurs where price equals to or less than average variable cost ( P = < AVC ).

b ) Ans: The firm should shutdown in the short run.

PRICE MC AIC LAVC PLOSS P = MRFAR OUTPUT

Explanation:

ATC = $2.00 , AVC = $1.50 , MR or market price = $1.00

In this case, firm is making loss and it will not shutdown production because the price is less than average variable cost ( P < AVC)

The shutdown point occurs where price equals to or less than average variable cost ( P = < AVC ).

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