Question

Consider the general case where all the cost curves have standard shapes. Suppose a perfectly competitive...

Consider the general case where all the cost curves have standard shapes. Suppose a perfectly competitive firm is incurring economic losses in the short run. Show this situation in a graph. Indicate how much economic losses are in your gaph. Should the firm shut down in the short run, according to your graph? Explain.

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Answer #1

There are two graphs A and B the graph

A show firm incurring losses in the short run because of the price of the goods is equal to AVC and MC and SAC is rising. This because the firm is able to recover the variable cost.

The graph B is showing the firm is in shutdown point because of the AVC greater than price and perfect competition firm cannot influence the price because firms are price takers.Thus it is rational to firm shut down for the business.

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