Answer:
A. $-2,250
B. The firm should continue to operate in the short run because price is greater than average variable cost
C.The firm should exit in the long run because it is making losses
D. In the long run, prices would increase because in a competitive firm, price must equal average cost. As firms exit the industry, supply would fall and this would lead to an excess of demand over supply. As a result, price would rise
Explanation:
A perfect competition is characterised by many buyers and sellers of homogenous goods and services. Market prices are set by the forces of demand and supply. There are no barriers to entry or exit of firms into the industry.
In the long run, firms earn zero economic profit. If in the short run firms are earning economic profit, in the long run firms would enter into the industry. This would drive economic profit to zero.
Also, if in the short run, firms are earning economic loss, in the long run, firms would exit the industry until economic profit falls to zero.
Profit = Total revenue - Total cost
( $2.50 - $2.80) × 7,500 = $-2,250
The firm is earning a loss
A firm should shutdown in the short run if price is less than average variable cost.
Average variable cost = average total cost- average total cost
$2.80 - $0.75 = $2.05
2.50 > 2.05 so the firm should continue to operate in the short run.
The firm should exit in the long run because it is making losses
In the long run, prices would increase because in a competitive firm, price must equal average cost
I hope my answer helps you.
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