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Zorluk: ZorPerfect Competition: Price and Output Determination in Short and Long Run

When a firm in a perfectly competitive market faces a market price equal to the minimum point of its short-run average variable cost (AVCAVC) curve, its total economic loss from producing the profit-maximizing output is identical to its total fixed cost (TFCTFC), making its short-run operational loss equal to the loss incurred by shutting down immediately.

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The statement is True.
The statement is true because at the short-run shutdown price (P=min AVCP = \text{min } AVC), total revenue (TRTR) exactly matches total variable cost (TVCTVC). Subtracting total cost (TC=TFC+TVCTC = TFC + TVC) from total revenue leaves an economic loss equal to −TFC-TFC. Because shutting down entirely also yields an economic loss of −TFC-TFC, the financial loss is identical whether the firm operates or halts production.

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1
Formulate total revenue (TRTR) and total variable cost (TVCTVC) at output Q∗Q^* where P=min AVCP = \text{min } AVC.
TR=P×Q∗TR = P \times Q^* and TVC=AVC×Q∗TVC = AVC \times Q^*. Since P=AVCP = AVC, TR=TVCTR = TVC.
To evaluate whether revenue covers variable operating expenses at the short-run shutdown threshold.
2
Calculate total economic loss when the firm produces Q∗Q^*.
\text{Loss} = TC - TR = (TFC + TVC) - TVC = TFC.
Because TRTR offsets TVCTVC completely, the net loss equals unrecovered fixed costs.
3
Calculate total economic loss when the firm shuts down (Q=0Q = 0).
\text{Loss} = TC - TR = (TFC + 0) - 0 = TFC.
At zero output, variable costs and revenues are zero, leaving fixed costs as the total loss.
4
Compare the economic losses under both choices.
\text{Loss when producing } (TFC) = \text{Loss when shut down } (TFC).
Demonstrates that operating at P=min AVCP = \text{min } AVC yields the exact same monetary loss as shutting down immediately.

Anahtar Kavram

Short-run shutdown decision and fixed cost loss equivalence in perfect competition
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Konular

Perfect Competition: Price and Output Determination in Short and Long Run

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