Problem 16 If the price is between the shut... [FREE SOLUTION]

Chapter 21: Problem 16

If the price is between the shut-down point and the break-even point, the firm is in the (LO6) a) short run making a profit b) short run taking a loss c) long run making a profit d) long run taking a loss

Short Answer

Expert verified

When the price is between the shut-down point and the break-even point, the firm is in the \(short\ run\ taking\ a\ loss\). The correct answer is option \(b)\).

Step by step solution

Understand shut-down and break-even points

A shut-down point is the level at which the price is equal to the minimum of the average variable cost (AVC). Below this point, the firm will cease production to minimize its losses. A break-even point is the level at which price equals the minimum of the average total cost (ATC). At this point, the firm is just covering its total costs, earning zero profits.

Analyze the short run scenarios

In the short run, the firm has fixed costs that cannot be altered. When the price is between the AVC and ATC, the firm can at least cover its variable costs, which is better than shutting down completely. However, it will not be able to cover all of its total costs, meaning it will have some losses. So in the short run, the firm will be taking a loss.

Analyze the long run scenarios

In the long run, all costs become variable costs, and the firm can adjust its production to minimize its losses completely or move towards profitability. If the price remains consistently between the shut-down point and the break-even point, the firm may choose to exit the market in the long run, meaning it will no longer suffer from any losses.

Choose the correct answer

Based on our analysis, when the price is between the shut-down point and the break-even point, the firm is in the short run taking a loss. Therefore, the correct answer is option b) short run taking a loss.