Economics operating on a short term loss

label Economics
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Should a company operate at a loss in the short-run?  Please explain your answer based upon the TR, TC, AFV, AFC, and ATC curves.  A simple 3 sentence explanation will work or more.  

Nov 12th, 2014

We know ATC = AVC + AFC. From the graph we can see that when Q is equal to 10 units, ATC = $9 per unit and AVC = $2 per unit. Thus, AFC = ATC – AVC = $9 per unit - $2 per unit = $7 per unit. To find FC recall that AFC = FC/Q. Rearranging this we get FC = AFC*Q or ($7 Per unit)(10 Units) = $70.

b. We know that the ATC of producing 15 units of output is $8 per unit. We can use this information to calculate the TC of producing 15 units of output: ATC = TC/Q or TC = ATC*Q. Thus, TC = ($8 per unit)(15 units) = $120. From (a) we know that the firm’s FC is equal to $70. This implies that VC = $50 since TC = FC + VC. AVC = VC/Q = ($50 per unit)(15 units) = $3.33 per unit of output.

c. In the short run if price is $9 per unit you know that the firm is earning positive economic profits since the price is greater than the breakeven price (Breakeven price is $8 per unit or the minimum point of the ATC curve). This implies that TR is greater than TC. We know that TC is greater than $120 since when price is $9 per unit the firm is producing more than 15 units and the average cost of producing these units is greater than $8 per unit. We know that FC is still equal to $70. Since TC is greater than $120 and FC is equal to $70, this implies that VC is greater than $50.

The long-run prediction is entry of firms into this industry since short-run economic profits are positive.


Nov 12th, 2014

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Nov 12th, 2014
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Nov 12th, 2014
Sep 24th, 2017
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