logo image

Analysis of Markets and Public Policy

Why would a firm that incurs losses choose to produce rather than shut down? Losses occur when revenues do not cover total costs. If revenues are greater than variable costs, but not total costs, the firm is better off producing in the short run rather than shutting down, even though it is incurring a loss. The reason is that the firm will be stuck will all its fixed cost and have no revenue if it shuts down, so its loss will equal its fixed cost.

If it continues to produce, however, and revenue is greater than variable costs, the firm can pay for some of its fixed cost, so its loss is less than it would be if it shut down. In the long run, all costs are variable, and thus all costs must be covered if the firm is to remain in business. 3. In long-run equilibrium, all firms in the industry earn zero economic profit. Why is this true? The theory of perfect competition explicitly assumes that there are no entry or exit barriers to new participants in an industry.

With free entry, positive economic profits induce new entrants. As these firms enter, the supply curve shifts to the right,

Need essay sample on "Analysis of Markets and Public Policy"? We will write a custom essay sample specifically for you for only $13.90/page

causing a fall in the equilibrium price of the product. Entry will stop, and equilibrium will be achieved, when economic profits have fallen to zero. 1 1 . What assumptions are necessary for a market to be perfectly competitive? In light of what you have learned in this chapter, why is each of these assumptions important?

The three primary assumptions of perfect competition are (1) all firms in he industry are price takers, (2) all firms produce identical products, and (3) there is free entry and exit of firms to and from the market. The first two assumptions are important because they imply that no firm has any market power and that each faces a horizontal demand curve. As a result, firms produce where price equals marginal cost, which defines their supply curves. With free entry and exit, positive (negative) economic profits encourage firms to enter (exit) the industry.

Entry and exit affect industry supply and price. In the long run, entry or exit continues until price equals long-run average cost and firms earn zero economic profit. Exercises 1. The data in the table below give information about the price (in dollars) for which a firm can sell a unit of output and the total cost of production. A. Fill in the blanks in the table.

Read full document

Can’t wait to take that assignment burden offyour shoulders?

Let us know what it is and we will show you how it can be done!
×
Sorry, but copying text is forbidden on this website. If you need this or any other sample, please register
Signup & Access Essays

Already on Businessays? Login here

No, thanks. I prefer suffering on my own
Sorry, but copying text is forbidden on this website. If you need this or any other sample register now and get a free access to all papers, carefully proofread and edited by our experts.
Sign in / Sign up
No, thanks. I prefer suffering on my own
Not quite the topic you need?
We would be happy to write it
Join and witness the magic
Service Open At All Times
|
Complete Buyer Protection
|
Plagiarism-Free Writing

Emily from Businessays

Hi there, would you like to get such a paper? How about receiving a customized one? Check it out https://goo.gl/chNgQy