The case where the firm is incurring short

The case where the firm is incurring short -...

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The case where the firm is incurring short-run losses but continues to operate is illustrated  graphically in Figure 2  (a). At the market price,  P 1 , the firm's profit maximizing quantity is  Q 1 . At this  quantity, the firm's average total cost curve lies  above  its marginal revenue curve, which is the flat,  dashed line denoting the price level,  P 1 . The firm's average variable cost curve, however, lies  below  its marginal revenue curve, implying that the firm  is able  to cover its variable costs. The firm's  losses  from producing quantity  Q 1  at price  P 1  are given by the area of the shaded rectangle,  abcd.  Despite  these losses, the firm will decide not to shut down in the short-run because it receives enough  revenue to pay for its variable costs.  Figure 2 The firm's short-run shut-down decision Figure 2
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This note was uploaded on 11/19/2011 for the course ECO 1310 taught by Professor Staff during the Fall '10 term at Texas State.

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The case where the firm is incurring short -...

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