15 May HOW DO YOU KNOW THAT THIS IS THE MARKET STRUCTURE?
You have been given the following graph depicting the short-run cost structure of a firm.
Assume that the firm is currently producing 15 units of output. You need to explain
specific reasons:
• What the firm should do to maximize profits or minimize losses? If it should change its
output from Q=15 to another level of output, explain what that new level of output
should be and WHY that new level of output will be profit maximizing or loss minimizing.
• Explain what market structure this firm is operating in. How do you know that this is the
market structure? What implications does the market structure have for the firms’ pricing
and output decisions in both the short and long run?
• At the profit-maximizing or loss-minimizing level of output in the short run, will this firm
be operating at a loss or earning a profit or just breaking even? How do you know? If
there is a loss or a profit, what is its size? Should this firm shutdown in the short-run?
Why or why not?
• What will happen to firms in this industry in the long run? What will be the long-run
price of output sold in this market in the long run? Explain how you know what will
happen to prices and firms in the long run. Predict what you think will happen in the long
run to this firm.
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