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ECON 1000 Lecture Notes - Lecture 16: Perfect Competition, Marginal Revenue, Demand Curve

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blackotter881
27 Nov 2011
School
York University
Department
Economics
Course
ECON 1000
Professor
George Georgopoulos

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ECON 1000 Full Course Notes
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Document Summary

If the firm makes an economic loss it must decide to exit the market or to stay in the market. If the firm decides to stay in the market, it must decide whether to produce something or to shut down temporarily. The decision will be the one that minimizes the firms loss. If your total revenue is less than your variable costs, then it would be wise to shut down. The firm"s loss equals total fixed cost plus total variable cost, minus total. Economic loss = tfc + tvc - tr. = tfc + (avc - p) x q. If the firm shuts down, q is 0 and the firm still has to pay its tfc. The firm incurs a loss equal to its fixed costs. A firm"s shutdown point is the price and quantity at which it is indifferent between producing and shutting down. This point is where avc is at its minimum.

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Related Questions

42) Suppose a firm is trying to decide whether or not to temporarily shut down to minimize total loss. If price equals average variable cost, then A) total variable cost equals total fixed cost. B) total revenue equals total variable cost, and the loss equals total fixed cost. C) total revenue equals total fixed cost, and the loss equals total variable cost. D) total cost equals total variable cost. E) total fixed cost is zero.

If a perfectly competitive firm's total revenue is less than its total variable cost, the firm:
A. Should raise its price above its average variable cost.
B. Should continue to produce and increase its demand.
C. Should adopt new technology in order to lower its costs of production.
D. Should stop production by shutting down temporarily.
 

Suppose that the market for microwave ovens is a competitive market. The following graph shows the daily cost curves of a firm operating in this market.

1) For each price in the following table, calculate the firm's optimal quantity of units to produce, and determine the profit or loss if it produces at that quantity, using the data from the graph. Assume that if the firm is indifferent between producing and shutting down, it will produce. Assume all costs are in dollars.

2) What is the firm's shutdown price (where it is optimal for the firm to shut down)?

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