Answer to Question #312943 in Microeconomics for Yannick

Question

 a. Why would a firm that incurs losses choose to produce rather than shut down?

b. The supply curve for a firm in the short run is the short-run marginal cost curve (above the point of minimum average variable cost). Why is the supply curve in the long run not the long-run marginal cost curve (above the point of minimum average total cost)?

c. In long-run equilibrium, all firms in the industry earn zero economic profit. Why is this true?

Answer 1

a. The situation where the total revenues of the firm made in a specific period of time do not cover the total costs of the firm the loss is exhibited. On the other hand if revenues of the firm are more than the total variable costs, but les than the total costs, then the firm is better off making production in the the short run rather than shutting down though it will still make loses.

b. This is because as the market prices goes up significantly, the firm will have a tendency of supplying more of its products into the market because of the increased prices in relation to the laws of supply.

c. This is because the theory of the perfect competition normally assumes that there is restricted entry or exit of the new firms into the industry.