Ch24_PCshutdown

Ch24_PCshutdown - MICROECONOMIC PRINCIPLES Competitive firm...

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Unformatted text preview: MICROECONOMIC PRINCIPLES Competitive firm short run shut down decision By setting MR = P = MC, the firm is finding the optimal output level but, there is no guarantee that the firm will be making profits. It is possible that this profit maximizing level of output could generate a loss for the firm. There are times when a firm will want to shut down if they are generating a loss and then there are times when the firm will still stay open even though they have losses. The decision to shut down can be determined in two ways; 1) you can compare fixed costs to the losses from staying open to determine which is decision minimizes losses, or 2) you can compare the average variable cost with the price, because if the price is covering AVC then the fixed costs are larger than the losses of staying open so you should remain open even with losses. But, what would happen if the market price fell below the ATC, maybe to $10? The firm’s sales would drop to q’ (equal to 75) and the firm would be losing $4 with every hat they sell because the ATC at q’ is $14. q’ (equal to 75) and the firm would be losing $4 with every hat they sell because the ATC at q’ is $14....
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This note was uploaded on 12/13/2010 for the course ECON 201 taught by Professor Egger during the Fall '06 term at Towson.

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Ch24_PCshutdown - MICROECONOMIC PRINCIPLES Competitive firm...

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