Shut Down decision in the SR and in the LR.
Exhibit below shows a firm in a price-taker market. Make use of the diagram to answer the following questions.
1) Market Price = $20. If this firm wants to maximize its profits, how many units, Q, should it produce? Be careful, there is a trick in the graph!
2) What will be the firm’s Total Revenue at this level of output? Total Cost? Profit?
Replicate the exhibit and shade in the area corresponding to the economic profit of the firm.
3) Suppose the market price fell down to $5 per unit. Would this firm stay in the market in the Short Run or quit? Would this firm stay in the market in the Long Run?
Explain in one sentence the intuition behind your answer.
4) Suppose the market price fell down to $7 per unit. Would this firm stay in the market in the Short Run or quit? Would this firm stay in the market in the Long Run?
Explain in one sentence the intuition behind your answer.
5) How many firms are there in this industry? (Hint: compare total market output to this firm’s output and remember: all firms in the industry are identical).
