Question

1. Under what conditions will a firm exit a market? Explain.

2. Does a competitive firm’s price equal its marginal cost in the short run, the long run, or both? Explain.

3. Does a competitive firm’s price equal the minimum of its average total cost in the short run, the long run, or both? Explain.

4. Are market supply curves typically more elastic in the short or long run? Explain.

Answer 1

1.If the price in the market falls below the minimum of average variable costs of production, the firm will shut down in the short run. In the long run there are no fixed costs and all are variable costs, so the firms will shut down when price falls below min ATC.

2.The price is constant and equal to MR and AR in the short as well as the long run. The equilibrium condition is satisfied when MR=MC, but Mr equals P in perfectly competitive market. So in the long run and the short run the equilibrium occurs at P=MC.