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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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BuyFindarrow_forward

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

If a profit-maximizing, competitive firm is producing a quantity at which marginal cost is between average variable cost and average total cost, it will

a. keep producing in the short run but exit the market in the long run.

b. shut down in the short run but return to production in the long run.

c. shut down in the short run and exit the market in the long run.

d. keep producing both in the short run and in the long run.

To determine
Theshort run and long run effects of the competitive market.

Explanation

Option (a):

In the short run, if the firm is priced less than the average total cost and greater than the average variable cost, then it recovers the full variable cost along with the portion of fixed cost. This would minimize the cost of the firm in the production. Since the firm is able to recover its fixed cost partially, it would run in the short run. But, in the long run, the firm faces loss and shutdown of the business. Thus, option ‘a’ is correct.

Option (b):

In the long run, the firm can change its capital as per the requirement...

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