Question

In the short run, is the firm making economic profit or suffering loss? How
much is that profit or loss? Should the firm shut down?

Answer 1

Answer:

profit of 1crore

Explanation:

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Answer 2

In short run,a perfectly competitive firm can earn either an economic profit or loss.The volume of short run profit or loss depends Average Cost(AC) and Average Revenue(AR) or Price(P) in the short run.The firm shuts downs when the revenue earned by the firm is not enough to cover the Total Variable Cost(TVC)

Explanation:

In short run, a perfectly competitive earns an economic profit if $P/AR> AC$ and loss if $P/AR< AC$.If both P/AR and AC are equal then the firm is at the break-even point indicating that its short run average revenue is just enough to cover its average cost in short run.

The magnitude or volume of the profit or loss ideally depends on the relationship between P and AC.The movements of both the indicators determine the volume of the economic profit or loss in short run.If P is greater than AC, then the firm is earning economic profit and the actual difference between P and AC will determine the overall profit level and vise versa.

As stated earlier,if the firm is not able to cover the TVC from its existing revenue then it will typically decide to shut down.To elaborate,when the Marginal Revenue(MR) earned by the firm is equal to the Marginal Variable Cost but is less than the Marginal Total Cost and thus the Marginal Profit is negative.Shut down decision is a result of continuous loss in short run and there is no benefit maintaining business operation and can result from excessive expenses or costs and declining sales or production which results in revenue loss.