This graph shows the average total cost (ATC), marginal cost (MC), and average variable cost (AVC) curves for a typical firm in a perfectly competitive market.

Which price is associated with the firm producing in the short run, but exiting the industry in the long run?

Choose 1 answer:
(A) $P_{a}$
(B) $P_{e}$
(C) $P_{b}$
(D) $P_{c}$
(E) $P_{d}$

Question

This graph shows the average total cost (ATC), marginal cost (MC), and average variable cost (AVC) curves for a typical firm in a perfectly competitive market.

Which price is associated with the firm producing in the short run, but exiting the industry in the long run?

Choose 1 answer:
(A) $P_{a}$
(B) $P_{e}$
(C) $P_{b}$
(D) $P_{c}$
(E) $P_{d}$

Accepted Answer

∻Solution∻ ‖ a ⋮ Long-Run Equilibrium in Perfect Competition: In the long run, firms in a perfectly competitive market will enter or exit the industry until they are producing at the minimum of the average total cost (ATC) curve. At this point, price equals the minimum ATC, and firms earn zero economic profit. ‖ ‖ b ⋮ Short-Run Production Decision: In the short run, a firm will continue to produce as long as the price covers the average variable cost (AVC). If the price is below the AVC, the firm will shut down production to minimize losses. ‖ ‖ c ⋮ Exit in the Long Run: A firm will exit the industry in the long run if it cannot cover its average total costs, even if it can cover its average variable costs in the short run. This is because, in the long run, all costs are variable, and failure to cover ATC means the firm is incurring economic losses. ‖ ‖ d ⋮ Identifying the Exit Price: The price associated with the firm producing in the short run but exiting in the long run is the one that is above AVC (so the firm produces in the short run) but below ATC (so the firm incurs losses and exits in the long run). ‖ ∻Answer∻ ⚹ (C) $P_{b}$ ⚹ ∻Key Concept∻ ⚹ Short-Run Production vs. Long-Run Exit ⚹ ∻Explanation∻ ⚹ The price $P_{b}$ allows the firm to cover its average variable costs in the short run but not its average total costs, leading to an eventual exit from the market in the long run. ⚹◊What factors determine a firm's decision to exit or enter an industry in the long run in a perfectly competitive market?⍭ Generate me a similar question◊

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