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.

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

Studypool's Notebank makes it easy to buy and sell old notes, study guides, reviews, etc.