For a competitive firm, explain the difference between shutdown and exit. Explain the meanings, conditions, and...
For a competitive firm, explain the difference between shutdown and exit. Explain the meanings, conditions, and provide graphics is necessary.
Homework Answers
A competitive firm sets P=MC for profit maximization
The shutdown point for the competitive firm is given by where the Average variable cost is minimum.IF the price is less than the minimum AVC,then the firm will choose to not produce and shut down in order to minimize its losses in the short run.When the firm shuts down,it still incurs fixed cost and so its losses are equal to its fixed cost.
On the other hand,a firm exits the market if it is unable to make economic in the long run.In the long run,the competitive firm enjoys free entry and exit.So, the loss making firms will choose to exit the market in the long run,if the price doesn't increase.In the long run,when the firm exits the market then it does not incur its fixed cost as losses.
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For a competitive firm, explain the difference between shutdown
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