Answer to Question #59731 in Microeconomics for Poppy

Question

5
Assume, in an industry where there are no barriers to entry and firms are making an economic loss in the short run.
a) What options are available to firms in the short run to minimise their losses.
b) Using demand and supply analysis together with the cost curves, explain why the actions to minimise loss lead to firms’ making normal profit in the long run?

6
In a market structure where firms are mutually interdependent, price competition is not common. Explain using the game theory matrix, with relevant assumptions, how firms make decisions when they behave collusively and non-collusively. In the absence of price competition, how do firms maintain or increase their market share?

Answer 1

5. If in an industry where there are no barriers to entry and firms are marking an economic loss the short run, then:
Firms with ATC > P > AVC in the short run can minimise their losses producing optimal amount of output at MR = MC to cover their variable costs, and firms with P < AVC should shut down.
If some firms continue to produce covering its variable costs to minimise loss and some firms exit the market, in the long-run market price will increase, which will lead to firms making normal (zero) profit in the long run.

6. In such market firms make decisions according to their agreements when they collusive and according to the real and potential actions of its competitors non-collusively. In the absence of price competiton firms maintain or increase their­ market share by differentiation of their products, special marketing actions etc.