E Determine and Describe Breakeven and Shutdown Points of Production

Question 1

Short Run

Answer 1

Capital is fixed; firm cannot changes its ‘scale of operations’; plant and equipment

Question 2

Long Run

Answer 2

All factors are variable. Firms can let leases on plant and equipment expire, therefore selling them

Question 3

Shutdown and Breakeven Points under Perfect Competition

Answer 3

Conditions: TR(sales) = TFC + TVC; Pgood = AR, AVC; Breakeven Output Q and Econ profit = 0

SR; Continue Operation; AR>AVC
LR; discontinue operation; ATC> Pgood

SR Shutdown point: AVC>AR, SR operating point;even with losses; AR>AVC
LR Shutdown point:

If AR=AC; econ = 0

P1>P; +Econ profit
P>P1; -Econ profit (economic losses)

AR>eqATC stay in SR and LR
AR>eqAVC, but ATC>AR, stay in SR, exit in LR
AVC>AR, Shutdown SR, exit LR

Question 4

Shutdown and Breakeven Points under Imperfect Competition; price searchers; downward sloping demand curve

Answer 4

Breakeven; TR=TC
Continue SR, Shutdown LR; TC>TR>TVC
Shutdown SR, LR; TVC>TR

*P doesnt = AR or MargR;perfect comp it does; in imperfect comp.

Imperfect Econ Profits: Between Breakeven Min parameter and Breakeven max parameter

Question 5

In the short run, if price is below average total cost (ATC) the firm will:**

Answer 5

keep running as long as it is covering its variable costs.
In the short run, if the firm is covering its average variable costs and some of its fixed costs it will continue to operate as long as the situation is temporary.