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a) What 4 outcomes will a binding minimum wage have, and what 1 outcome has 2...

a) What 4 outcomes will a binding minimum wage have, and what 1 outcome has 2 possibilities.

b) When is a perfectly competitive firm in the short run? What 3 outcomes can a firm face in the short run, and what would be each result moving into the long run?

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Answer #1

b. A perfectly competitive firm is in short-run equilibrium when marginal revenue is same as marginal cost and price is same as marginal revenue because the price is fixed and constant.

Outcome 1= Loss when P < ATC

Outcome 2 = indifferent between shutdown and produciton when P = AVC

Outcome 3 = Profit when P > ATC

I long run, P = ATC and there is no profit no loss situation because firms who were in loss exit the industry whereas those earning profit who entered remain at zero profit.

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