What should a firm do in the short run if profit is negative at the quantity whe
ID: 1151995 • Letter: W
Question
What should a firm do in the short run if profit is negative at the quantity where MR = MC?
What should it do in the long run?
In a perfectly competitive market, what is required for a market outcome (some P and Q) to be a short-run equilibrium? What’s required for a market outcome to be a long-run equilibrium?
What makes an industry a constant-cost industry? An increasing-cost industry?
What’s a natural monopoly?
What should a firm do in the short run if profit is negative at the quantity where MR = MC?
What should it do in the long run?
In a perfectly competitive market, what is required for a market outcome (some P and Q) to be a short-run equilibrium? What’s required for a market outcome to be a long-run equilibrium?
What makes an industry a constant-cost industry? An increasing-cost industry?
What’s a natural monopoly?
Explanation / Answer
1.
If the firms run a negative profit in short run then it should continue its operations if covers its variable costs. If it doesn't cover its variable cost then it should quit production and leave the market.
If it runs a loss in the long run, then it must leave the market and quit production.
2.
For market outcome to be a short run equilibrium it must be the case that the firm must be a price taker and it produces an output level where price must be equal to marginal cost (i.e. P = MC).
In the long run, the firm must produce an output level where P = ATC = LRAC. That is the firm earns a normal profit.
3. In the long run, a firm may experience a surge in demand. A natural response to such a surge in demand would be to increase the output level. If the increase in supply takes place with an increase in cost then the industry is called constant cost industry. If such an increase in supply takes place with an increase in cost then its called an increasing cost industry.
4. A natural monopoly is a firm that faces high fixed costs to set up. Such a monopoly firm operates on the downward sloping part of an Average Cost curve. The firm will choose to produce an output level where price equals long run average cost curve.
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