Author Question: Explain the three fundamental decisions that firms in perfectly competitive markets mustmake. ... (Read 61 times)

codyclark · **on:** Jun 29, 2018

Explain the three fundamental decisions that firms in perfectly competitive markets mustmake. Explain how these decisions are interrelated.

What will be an ideal response?

Question 2

A monopoly firm is producing where its marginal revenue is equal to marginal cost. At this level of output, the firm's price is 3.75 and its average total cost is 4.50 . Is the firm earning a profit? Explain.

How could this firm determine whether it should continue to operate in the short run or if it should shut down?

randomguy133 · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

Firms must decide how much to produce and supply in the output market, which technology to use, and how much of each input to demand. These three decisions are interrelated because the decision of how much to supply depends on costs of production, which in turn depends upon the technology used and the amount of inputs used. The use of inputs will depend on the amount of output produced.

Answer to Question 2

The firm is incurring an economic loss. Its price (3.75) is less than its average total cost (4.50). In order to determine if the firm should continue operating in the short run, we must compare the firm's price with its average variable cost. As long as the price is greater than average variable cost, the firm should continue to operate.