Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 21: Problem 16

If the price is between the shut-down point and the break-even point, the firm is in the (LO6) a) short run making a profit b) short run taking a loss c) long run making a profit d) long run taking a loss

Short Answer

Expert verified
When the price is between the shut-down point and the break-even point, the firm is in the \(short\ run\ taking\ a\ loss\). The correct answer is option \(b)\).

Step by step solution

01

Understand shut-down and break-even points

A shut-down point is the level at which the price is equal to the minimum of the average variable cost (AVC). Below this point, the firm will cease production to minimize its losses. A break-even point is the level at which price equals the minimum of the average total cost (ATC). At this point, the firm is just covering its total costs, earning zero profits.
02

Analyze the short run scenarios

In the short run, the firm has fixed costs that cannot be altered. When the price is between the AVC and ATC, the firm can at least cover its variable costs, which is better than shutting down completely. However, it will not be able to cover all of its total costs, meaning it will have some losses. So in the short run, the firm will be taking a loss.
03

Analyze the long run scenarios

In the long run, all costs become variable costs, and the firm can adjust its production to minimize its losses completely or move towards profitability. If the price remains consistently between the shut-down point and the break-even point, the firm may choose to exit the market in the long run, meaning it will no longer suffer from any losses.
04

Choose the correct answer

Based on our analysis, when the price is between the shut-down point and the break-even point, the firm is in the short run taking a loss. Therefore, the correct answer is option b) short run taking a loss.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Circle the letter that corresponds to the best answer. A firm with explicit costs of \(\$ 2,000,000\), no implicit costs, and total revenue of \(\$ 3,000,000\) would have (LO2) a) zero economic profit b) zero accounting profit c) an accounting profit and an economic profit of \(\$ 1,000,000\) d) a higher economic profit than an accounting profit e) a higher accounting profit than economic profit

The perfect competitor's demand curve is (LO4) a) always horizontal b) always vertical c) sometimes horizontal d) sometimes vertical

Perfect competition is (LO4) a) the prevalent form of competition in the United States b) the only form of competition in the United States c) found occasionally d) probably impossible to find

Statement I: No firm will stay in business more than one year if it is losing large sums of money. Statement II: Many dot-coms have lost money in the short run. (LO3) a) Statement \(\mathrm{I}\) is true, and statement II is false. b) Statement II is true, and statement \(I\) is false. c) Both statements are true. d) Both statements are false.

The most efficient output (LO7) a) is always equal to the most profitable output for the perfect competitor b) is never equal to the most profitable output for the perfect competitor c) is equal to the most profitable output for the perfect competitor only in the long run d) is equal to the most profitable output for the perfect competitor only in the short run
See all solutions

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free