If a firm has short-run losses, will it stay open? Under what conditions will a firm close in the short run? Explain
The firm suffers losses if P < AC so that revenue does not cover costs. The firm will stay open if P > minimum of AVC. If the firm shuts down, revenue falls to zero but fixed costs continue as obligations of the firm. Therefore, if P > minimum of AVC, the firm can cover its variable (avoidable) obligations and a portion of fixed (unavoidable) obligations. Such a decision cuts losses, so that it is more profitable to produce than to close. However, if P < minimum of AVC, the firm should close. Revenue is insufficient to cover variable (avoidable) costs, much less cover some portion of fixed (unavoidable) costs. Loss minimization in this case requires closing down.
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Twenty-nine countries in Europe have formed the European Union (EU). After the EU was formed it
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What is one reason car insurance seems much cheaper than health insurance?
A) Health insurance entails more idiosyncratic than systematic risk, and therefore the gains to diversification are more dramatic. B) Car insurance entails more systematic than idiosyncratic risk, and therefore the gains to diversification are more dramatic. C) Health insurance entails more systematic than idiosyncratic risk, and therefore there are fewer gains to diversification. D) Health insurance is manipulated through market power, and car insurance is not.
Suppose a steel firm and a cookware company merge. This merger would be classified as:
a. a horizontal merger. b. a vertical merger. c. a conglomerate merger. d. either a horizontal or conglomerate merger, depending on the nationality of the companies. e. either a horizontal or conglomerate merger, depending on the market shares of the two companies.