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On what basis does a firm decide whether or not to shut down? On what basis does it decide whether or not to go out of business?

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Divya Singh
Divya SinghLv10
28 Sep 2019

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Related questions

1- How does the price faced by a profit-maximizing competitive firm compare to its marginal cost? Explain.

2- When does a profit-maximizing competitive firm decide to shut down?

3- When does a profit-maximizing competitive firm decide to exit a market?

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.

DISCUSSION QUESTION PART 1: Explain, in your own words, why profit maximization happens at the point where MR = MC, and not where MR is greater than MC. Refer to Figure 7.2. in the textbook. Should the 4th unit of output be sold? What about the 5th unit, 6th unit, 7th unit, 8th unit, 9th, or 10th unit? Use your understanding of MR = MC rule to explain.

DISCUSSION QUESTION PART 2: If you are the manager of a perfectly competitive firm that is making a loss (TR < TC), would you decide to shut it down? Under what circumstances would you decide to operate an unprofitable business?

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