3.6

Question 1

Shut Down Rule

Answer 1

A firm should continue to produce as long as the
price is above the AVC
* When the price falls below AVC then the firm
should minimize its losses by shutting down
* Why? If the price is below AVC the firm has a
loss that is bigger than their fixed cost.

P<AVC. They should shut down

Question 2

What is MC above AVC?

Answer 2

The MC above AVC is a short-run supply curve.

Question 3

Marginal Costs and Supply

Answer 3

A firm will produce nothing if the price is below minimum AVC

As price increases, the quantity produced increases

When price increases, quantity increases; When price decrease, quantity decreases

If variable costs increase (ex: per unit tax)

What if variable costs decrease (ex: subsidy)?

Question 4

Barriers to Entry and Profit

Answer 4

• “Barriers to entry” are the factors that
  prevent new firms from entering a given
  market.
• A market with low barriers has more
  competition and individual firms make less
  profit.
• A market with high barriers has less
  competition and individual firms make more
  profit.