Economics Quiz

Subject: Customer Relationship Management

Paper Model: APA

Paper Type: Application Essay

Total Words: 403

Document Outline

In the long run with free entry and exit, is the price in market is equal to marginal cost, average total cost, both or neither? Explain?

How does a competitive firm determine its profit-maximizing level of output? Explain. When does a Profit maximizing competitive firm decide to shut down? When does it decide to exit a market


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In the long run with free entry and exit, is the price in market is equal to marginal cost, average total cost, both or neither? Explain?

In the long run, price is equal to both marginal cost (MC) and average total cost (ATC), with free entry and exit for the firms.  This situation is depicted in the figure below. Firms choose their quantities so that price is equal to their marginal cost. In addition, firms make sure that their profit is maximized. However, in the long run, free entry and exit in the industry drives the price of the good to the minimum point and price becomes equal to marginal cost and average total cost. Therefore, at this point firms make zero economic profit as shown in the figure below:

 Price (P)                                                                    Marginal Cost (MC)

 

                                                                                                                             Average Total

                                                                                                                            Cost (ATC)

 

 

 
   

 

 

 

 

                      

  1. Q

Price becomes perfectly elastic, in most of the situations in the long run, because there is free entry and exit, therefore, price reaches appoint where it becomes equal to zero.

Q2. How does a competitive firm determine its profit-maximizing level of output? Explain. When does a Profit maximizing competitive firm decide to shut down? When does it decide to exit a market?

Every firm wants to achieve the level of output where it can maximize its profit.  Firms profit changes at different level of output. So, firms chose the level where it can achieve the maximum profit. Such a level of output is achieved, when firm establishes equilibrium position.   There are two approaches which can be followed, one is total revenue and total cost approach and other is marginal cost and marginal level approach. Here, I would argue that Firm can maximize its profit, when marginal revenue is equal to its marginal cost. Because, if the price was above the marginal cost, firm would increase its profit by increasing its level ofoutput, however, if the price were below the marginal cost, firm will have to increase its profits by reducing the level of output.

A profit maximizing firm can decide to exit the market, in the short run, when its price is less than its average variable cost. However, in the long-run, when the price is less than the average total cost (ATC), firm will exit the market as shown in the figure below

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