Question

Under what conditions will a firm exit a market? Explain.

Answer 1

Answer: In the long run, when a firm can recover both fixed costs and variable costs, it will choose to exit if the price is less than average total cost.

Answer 2

The firm will exit from the market when the revenue it generates from ‘producing is less’ than the variable ‘costs of production’.

EXPLANATION:  

The firm will shut down the business and exit the market when the ‘marginal revenue’ is below average variable cost at the ‘profit-maximizing output’. This situation occurs if the ‘price’ is less than ‘average variable cost’. For the firm to continue operations it should have operated at the level of ‘output’ where ‘marginal revenue’ equals marginal cost.