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) $P_{b}$
(B) $P_{a}$
(c) $P_{c}$
(D) $P_{d}$
(द) $P_{e}$
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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) $P_{b}$
(B) $P_{a}$
(c) $P_{c}$
(D) $P_{d}$
(द) $P_{e}$
Report a probld

Accepted Answer

∻Solution∻ ‖ a ⋮ Definition of Short Run and Long Run: In microeconomics, the short run is a period during which at least one of a firm's inputs is fixed, while in the long run, all inputs can be varied. ‖‖ b ⋮ Short Run Production Decision: A firm will continue to produce in the short run as long as the price ($P$) covers the average variable cost (AVC). This means $P \geq AVC$. ‖‖ c ⋮ Long Run Exit Decision: In the long run, a firm will exit the industry if the price is below the average total cost (ATC). This means $P < ATC$. ‖‖ d ⋮ Identifying the Price: On the graph, the price level at which the firm covers its AVC but not its ATC is $P_{a}$. This is because $P_{a}$ is above the AVC curve but below the ATC curve. ‖ ∻Answer∻ ⚹ $P_{a}$ ⚹ ∻Key Concept∻ ⚹ Short Run vs. Long Run Production Decision ⚹ ∻Explanation∻ ⚹ In the short run, a firm will produce as long as the price covers the AVC, but in the long run, the firm will exit if the price is below the ATC. The price $P_{a}$ is above the AVC but below the ATC, indicating the firm will produce in the short run but exit in the long run. ⚹◊What impact does the firm's decision to exit the industry in the long run have on the market price in the short run according to the observed graph?⍭ Generate me a similar question◊

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