Answer to Question #187424 in Microeconomics for Hasnat Jilan

Question

What is the economic profit earned or loss incurred by the firm?

c. Based on your answers of (a) & (b) determine if the firm should shut down or operate in the

short run. Explain your answer.

d. Based on your answers of (a) & (b) determine what should be the firm's decision regarding exit in the long run. Explain your answer.

Answer 1

a.)An economic profit or loss is the difference between the revenue gained from the selling of an output and the costs of all inputs used, as well as any opportunity costs. Opportunity costs and explicit costs are excluded from income gained when measuring economic profit. Economic profit is used for internal review but not for open disclosure. After accounting for direct and indirect business costs, economic profit earned is the amount of money a company gains.

b.)Economic loss is the amount of money a company loses. The indirect opportunity cost – the expense of the alternative option that the company may have made is also factored into the equation.

Economic Profit may be positive, negative, or zero. Firms are more likely to enter the market if the economic profit is positive. If profit is negative, companies are tempted to leave the market. There is no incentive to enter or leave if the benefit is zero. Economic profit can be positive in both uncompetitive and competitive markets in the short run. Economic profit must be nil in the long run.

The existence of economic profits attracts entry, economic losses lead to exits from the market.

c.) The firm should operate in the short-run.

A firm will make a loss in the short term because it expects to make a profit in the future as prices rise or production costs decline. When the company cannot recover its fixed costs in the short run, it can opt to shut down temporarily if the price of the product is less than the average variable cost or if it can generate less production. If a company is profitable in the short term, it is more likely to expand existing factories or develop new ones. New businesses can also begin production.

A monopolistically competitive firm maximizes profit or minimizes losses in the short run by generating the quantity where marginal revenue equals marginal cost. Firms cannot alter the use of fixed inputs in the short run, but they can modify all factors of output in the long run.

Nonetheless, A company will make a profit in the short term. Hence, If there is a profit to be made, however, other companies may want to join the market.

d.)The firm should choose to exit the market in the long-run, because the market is flooded with competitors seeking profit which will drive profitability to point zero.

In the long run, when the firm can recover both fixed and variable costs, it will choose to exit if the price is less than average total cost.

 Here firms will respond to losses in the long run through a process of exit, in which existing firms reduce output or cease production altogether. A change in fixed cost will induce entry or exit in the long run so that price will change by enough to leave firms earning zero economic profit.

Economists also consider long-term economic profit when determining whether or not a company should enter or leave a market.