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  • Narrative Quiz Managerial Economics

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    Audrey Gayle Castelo Gervacio
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    Several firms in a perfectly competitive industry will exit the market if prices fall below average total cost, resulting in economic losses. As firms exit, supply decreases and prices rise, alleviating the economic losses. The higher prices lead to economic profits that entice new firms to enter the market. Entry continues until prices reach the zero-profit level, where no firm is making money. So some firms can survive a price drop if other firms exit the market. A firm incurring losses from revenues falling below total costs may choose to continue producing rather than shutting down. This is because fixed costs have already been paid in the short run, so shutting down only avoids variable costs while the fixed costs still must be paid. Continuing

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    Several firms in a perfectly competitive industry will exit the market if prices fall below average total cost, resulting in economic losses. As firms exit, supply decreases and prices rise, alleviating the economic losses. The higher prices lead to economic profits that entice new firms to enter the market. Entry continues until prices reach the zero-profit level, where no firm is making money. So some firms can survive a price drop if other firms exit the market. A firm incurring losses from revenues falling below total costs may choose to continue producing rather than shutting down. This is because fixed costs have already been paid in the short run, so shutting down only avoids variable costs while the fixed costs still must be paid. Continuing

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    © All Rights Reserved
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    17 views1 page

    Narrative Quiz Managerial Economics

    Uploaded by

    Audrey Gayle Castelo Gervacio
    Several firms in a perfectly competitive industry will exit the market if prices fall below average total cost, resulting in economic losses. As firms exit, supply decreases and prices rise, alleviating the economic losses. The higher prices lead to economic profits that entice new firms to enter the market. Entry continues until prices reach the zero-profit level, where no firm is making money. So some firms can survive a price drop if other firms exit the market. A firm incurring losses from revenues falling below total costs may choose to continue producing rather than shutting down. This is because fixed costs have already been paid in the short run, so shutting down only avoids variable costs while the fixed costs still must be paid. Continuing

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    © All Rights Reserved
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    DIVINE WORD COLLEGE OF LEGAZPI

    Managerial Economics (2nd Quiz: Narrative)


    Submitted by: Audrey Gayle Gervacio
    Course: BSMAC 1 (Block A)

    Industry X is characterized by perfect competition, so every firm in the industry


    is earning zero economic profit. If the product price falls, no firm can survive. DO
    YOU AGREE OR DISAGREE. Discuss and present your side.

    Disagree. Several firms in a competitive industry will exit the market if they incur
    an economic loss. An economic loss occurs when the price goes down below the
    average total cost. As these firms leave the industry, the production of supply
    decreases, and the prices rise. When the price increases high enough, the
    economic loss is alleviated, and exiting becomes unnecessary. As a result, the
    market price will briefly increase above the average cost curve, resulting in
    economic profits for the existing market firms.
    On the other hand, these economic profits entice more firms to enter the market.
    As new firms enter, the market supply curve shifts to the right. As the supply
    curve goes to the right, the market price falls, and economic returns for new and
    existing firms in the market decrease as well. Entry will continue to move supply
    to the right as long as there are profits in the market. This will come to an end
    when the market price reaches the zero-profit level, where no business is making
    any money. So my answer is that some firms survive if other firms exit the
    market.

    Why would a firm that incur losses choose to produce rather than to shut down?
    (Make your logical justification as manager.)

    When revenues fall short of total costs, losses arise. Revenues may still exceed
    variable expenses, but fixed costs will not. If a firm is losing money, it will want to
    reduce the losses. Shutting down can decrease variable expenses to zero, but the
    firm already has paid for fixed costs in the short run. Consequently, even if the
    business produces no supply, it will still lose money since it must pay for its fixed
    costs. That is why as long as the business pays its variable expenses, losses will
    be kept to a minimum. All costs are changeable in the long run. As a result, if the
    company is to stay in operation, all costs must be paid.

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