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Given the following curves, explain why a firm would remain in operation in the short run if price was at $mathrm{MR}_{1}$, but would shut down if price was at $mat...

Question

Given the following curves, explain why a firm would remain in operation in the short run if price was at $mathrm{MR}_{1}$, but would shut down if price was at $mathrm{MR}_{2}$.

Given the following curves, explain why a firm would remain in operation in the short run if price was at $mathrm{MR}_{1}$, but would shut down if price was at $mathrm{MR}_{2}$.



Answers

In a few sentences, explain why the price of a commodity not
already at its equilibrium price should move in that direction.

So let's talk about why firms are going to be located at the bottom of the long run. Average cost curve. So here, try to grow long run. Um, average cost curve. And the answer to this is that firms they're going to want to be in this constant returns to scale point it. Why? Because this is going to raise profits. If we are somewhere here, right, then we're gonna wanna increase production, because again you hear where we're at economies of scale to reach, the larger we become, the lower prices were going to be our average costs are going to be. And again if this is a perfectly competitive market, we wanna be sure to give people the loads price, because that's going to make them by this good from us. And every firm is in the same mentality before they're selling the same good. So how do we lower prices will we have to lower costs, and that's going to happen by taking advantage of economies of scale and keep decreasing prices until we get to constant economies of scale. Now, we don't want to go past constant returns to scale because we get to these economies of scale. This is going to be problematic. This is going to be the situation in which our prices are gonna start to increase again. So firms want to stay in this constant returns to scale area that's going to maximize profits and make sure that they're competing with everyone else.

Let's talk about the marginal revenue curve and why is it that it's a straight line? Well, there's gonna be a straight line, because in the perfectly competitive market, the price is simply the price, and it's not going to change. So since the Martina revenue is to change in the total revenue over the change in quantity, you realize that the revenue you're getting or that extra revenue from making one more unit is the amount that you sell it for. So in the man you sell it for is just the price. So, Morgan, a revenue is always going to be equal to the price, and this number is not going to change based on your quantity, right? So whether your makings from zero to one unit margin, Remmy is going to be simply the price. If you go from 50 2 51 units again, market or revenue is simply how much to your total revenue increase? When you saw this one unit, where are total revenue simply increased by the price, uh, that we sold that one unit, so that's going to give you this very straight line parallel to the X axis

So a firm should shut it down when it is making an economic loss. And over here and firm always produces were marginal. Benefit equals marginal cost. So this is the quantity at which the firm is producing, and that is not a star. Ah, this is the quantity at which the firm is producing. And this is the cost that they have to pay. This is their revenue here, and this is their cost. So obviously they're making an economic loss that is equal to their loss. But should they still Ah, stay open? Why would they stay open immediately? So if they can at least cover their variable costs, there variable expenses. Over here, we hear they're at least covering their variable expenses. They could, um, you know, pay rent and they can pay their workers still until they find better jobs. So there's a reason so that firms can still stay open. But if this is average variable cost, however, if average variable cost is above the price, the firm is now making ah law so that they can't even cover their variable expenses. They're losing everything. They can't pay for their workers. They can't do anything the best thing to do would just be to, ah, you know, they would be maximizing profits by not making or selling anything.

Let's talk about profits in the monopolistic competitive market. Uh, so let's say that a firm is earning economic profits in the short run or they might be making losses in the showroom. What would happen in the long run? Well, you see, unlike monopolies who can hold profit in the long run, monopolistic competitors are not gonna be able to hold on to those profits. And that comes from the very low barriers to entry. That it's a feature of monopolistic competition he produces can enter and leave these markets whenever they want and because their products are gonna be somewhat similar if you have positive profits in any market. Ah, very soon you're gonna have someone coming in with a product that is very similar and not the same, but very similar. And that's when I soak up some of those profits. Um, similarly, if people start turning negative profits that one of those producers from making negative profits is gonna leave the market now, if they leave the market, there's going to be a bunch of consumers left without a product that they need, and they're going to go to another good. That is similar. Um, not the same, but similar enough that they'll be just as happy buying that product. Ah, so, for example, um, let's see Andrew E phones and Apple hi phones. If Apple one, they decided, You know what? We're making negative profits. Let's start making iPhones and they leave the market. No one else is making iPhones. Then those customers would very easily just move on to the android, uh, cell phones and be okay with that. It's not the preferred choice, but again, um, they're no longer iPhones. And again, that's going to increase that the man for androids giving the, uh, Andrew manufacturers higher profits and maybe getting them from negative profits to Ciro profits. And that's just one example as to how this would work in the long run. Oh, don't good go. Oh, no.


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