ECON 1 Lecture Notes - Lecture 15: Sunk Costs, Decision Rule, Perfect Competition
85 views7 pages
Document Summary
Shutdown: a short-run (sr) decision not to produce anything because of market conditions. Exit: a long-run (lr) decision to leave the market. If shut down in sr, must still pay fc. Cost of shutting down: revenue loss = tr. Benefit of shutting down: cost savings = vc (firm must still pay fc) So, shut down if tr < vc. Divide both sides by q: tr/q < vc/q. So, firm"s decision rule is: shut down if p < avc. Def: sunk cost = a cost that has already been committed and cannot be recovered. Sunk costs should be irrelevant to decisions; you must pay them regardless of your choice. Fc is a sunk cost: the firm must pay its fixed costs whether it produces or shuts down. So, fc should not matter in the decision to shut down. Cost of exiting the market: revenue loss = tr.
Get access
Grade+20% off
$8 USD/m$10 USD/m
Billed $96 USD annually
Homework Help
Study Guides
Textbook Solutions
Class Notes
Textbook Notes
Booster Class
40 Verified Answers
Class+
$8 USD/m
Billed $96 USD annually
Homework Help
Study Guides
Textbook Solutions
Class Notes
Textbook Notes
Booster Class
30 Verified Answers
Related Documents
Related Questions
Match the following.
constant-cost industry | A market structure in which a large number of firms sell a homogenous product or service with no restrictions on entry or exit and each firm is a price-taker. |
increasing-cost industry | The demand facing a price-taking firm. |
long-run equilibrium | A firm produces zero output but must still pay its fixed costs. |
marginal revenue product | Price below which a firm shuts down in the short run. |
perfect competition | All firms produce where price equals long-run marginal cost, and economic profits are zero. |
perfectly elastic demand | Industry in which input prices rise as all firms in the industry expand output. |
shut down | Industry in which input prices remain constant as all firms in the industry expand output. |
the shut-down price | The additional revenue earned by hiring one more unit of a variable input. |