What profit-maximizing firm continue to operate if the price in the market fell below its average cost of the production in the short run?

Would a profit-maximizing firm continue to operate if the price in the market fell below its average cost of production in the short run? A. No, a firm should never produce if its price falls below average total cost.

When should a firm shut down in the short run?

In the short run, a firm that is operating at a loss (where the revenue is less that the total cost or the price is less than the unit cost) must decide to operate or temporarily shutdown. The shutdown rule states that “in the short run a firm should continue to operate if price exceeds average variable costs. ”

When a perfectly competitive firm finds that its market price is below?

When a perfectly competitive firm finds that its market price is below its minimum average variable cost, it will sell: Nothing at all; the firm shuts down. Any positive output the entrepreneur decides upon because all of it can be sold. The output where average total cost equals price.

When should a firm shut down in the long run?

As a rule of thumb, a decision to shut down in the long run – i.e., exiting the industry – should only be undertaken if revenues are unable to cover total costs. It means in the long run, a firm making losses should shut down permanently and exit the industry.

What is the profit-maximizing rule for a firm?

The general rule is that the firm maximizes profit by producing that quantity of output where marginal revenue equals marginal cost.

Why must price cover average variable costs if the firm is to continue operating if price is less than average variable costs?

Why must price cover average variable costs if the firm is to continue operating? If price is less than average variable costs, the firm can continue to operate because losses will be covered. Price does not have to cover average variable costs; it only has to cover average fixed costs.

When profit-maximizing firms in competitive market are earning profits?

When profit-maximizing firms in perfectly competitive markets are earning economic profits, new firms will enter the market. economic profits are zero. selling the same good at different prices to different customers.

Why will a firm continue to operate in the long run earning zero profits?

In a perfectly competitive market, firms can only experience profits or losses in the short-run. In the long-run, profits and losses are eliminated because an infinite number of firms are producing infinitely-divisible, homogeneous products.

Why would a firm making losses continue to operate?

The general response is that a manager may continue to operate a business in the short-run even though it is incurring a loss. The reason is that if a firm stops operating, it is still incurring its fixed costs, that is, the cost associated with the fixed inputs.

What is profit-maximizing price and quantity?

The profit-maximizing quantity will occur where MR = MC—or at the last possible point before marginal costs start exceeding marginal revenue. On Figure 8.6, MR = MC occurs at an output of 5. The monopolist will charge what the market is willing to pay.

What is the profit-maximizing price?

The profit-maximizing choice for the monopoly will be to produce at the quantity where marginal revenue is equal to marginal cost: that is, MR = MC. If the monopoly produces a lower quantity, then MR > MC at those levels of output, and the firm can make higher profits by expanding output.

At what price should a firm produce to Maximise profits in a perfectly competitive market?

The profit-maximizing choice for a perfectly competitive firm will occur at the level of output where marginal revenue is equal to marginal cost—that is, where MR = MC. This occurs at Q = 80 in the figure.

What is profit maximization with example?

One of the most popular methods to maximize profit is to reduce the cost of goods sold while maintaining the same sales prices. … Examples of profit maximizations like this include: Find cheaper raw materials than those currently used. Find a supplier that offers better rates for inventory purchases.

How do you find profit-maximizing price from a table?

Profit Maximizing Using Total Revenue and Total Cost Data

Simply calculate the firm’s total revenue (price times quantity) at each quantity. Then subtract the firm’s total cost (given in the table) at each quantity.

How a profit-maximizing monopoly chooses output and price?

The monopolist will select the profit-maximizing level of output where MR = MC, and then charge the price for that quantity of output as determined by the market demand curve. If that price is above average cost, the monopolist earns positive profits.

Is profit Maximisation The main objective of a firm?

In the conventional theory of the firm, the principal objective of a business firm is profit maximisation. Under the assumptions of given tastes and technology, price and output of a given product under perfect competition are determined with the sole objective of maximising profits.

What are the two ways to determine the profit maximizing level of production?

The profit-maximizing level of production is 3 units, which can be determined by the greatest difference between total revenue and total cost, which is equal to profit, and can also be determined where marginal revenue is equal to marginal cost (or marginal revenue is the closest to marginal cost, without being below …

Does profit maximization is an operationally feasible objective of firm?

Answer: “The profit maximisation is not an operationally feasible criterion.” • The aforesaid statement is true because profit maximisation can be a short-term objective for any organisation and cannot be its sole objective.

Where is sales maximisation?

How to Maximize Sales Revenue. Theoretically, sales maximization is achieved when a business sells as much of a product or service as possible without making a loss, meaning the average revenue of a product or service is the same as its average cost to produce it. This is often achieved by strategically lowering prices …

What are the limitations of profit maximization?

While earning a profit is the goal of every business, profit maximization in financial management can put too much emphasis on profits and not enough emphasis on other aspects of the business such as customer retention, social and economic well-being, and other goals and aspects of the company.