Question

3. Do firms in a perfectly competitive market exhibit productive efficiency? Why or why not?

4. Given the following information, state whether the perfectly competitive firm should shut down or continue to operate in the short run. Explain your answer.

	Production data	Yes / No
a.	Q = 100; P = $10; AFC = $3; AVC = $4
b.	Q = 70; P = $5; AFC = $2; AVC = $7
c.	Q = 150; P = $7; AFC = $5; AVC = $6

Now provide explanations for your answers to parts a, b and c below:

a.

b.

C.

Answer 1

a) Yes, the firms in a perfeclty competitive firm is a productive efficient because they produce at the point where the ATC is at the lowest.

b) a) No, as the price is way above the ATC and AVC the firm is making a profit they will not shut down in the short run.

b) Yes, as the price is less than AVC they will shutdown in the short run.

c) No, here also the firm is making a loss in the short run but they will continue to produce in the short run because they are getting a price above the AVC.