ECON 1050 Chapter 12: Economics-1 (1) (dragged) 2

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If the firm makes an economic loss, it must decide whether 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 firm"s loss. The firm"s loss equals total fixed cost (tfc) plus total variable cost (tvc) minus total revenue (tr) Economic loss = tfc + tvr tr. = tfc + (avc p) x q. If the firm shuts down, q is 0 and the firm still has to pay its tfc. So the firm incurs an economic loss equals to tfc. This economic loss is the largest that the firm must bear. A firm"s shutdown point is the price and quantity at which it is indifferent between producing the profit-maximizing quantity and shutting down. The shutdown point is the minimum avc.

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