Author Question: Suppose the price level of a product is gradually declining due to fall in demand. When will a ... (Read 49 times)

acc299 · **on:** Jun 30, 2018

Suppose the price level of a product is gradually declining due to fall in demand. When will a producer of this product decide to shut down in the short run?

Question 2

In the short run, a firm continues to produce only if it can cover the:
a. fixed costs.
b. sunk costs.
c. explicit costs.
d. variable costs.
e. implicit costs.

Moriaki · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

A producer operating in this market will decide to stop production and shut down when the market price falls below his average variable cost of production. At this stage, staying in production means losing the fixed costs and not recovering all variable costs, and halting production means losing only the fixed costs.

Answer to Question 2

d