below average variable cost at the profit-maximizing quantity of output, then the firm should shut down

operations immediately. If the market price that a perfectly competitive firm faces is above average variable

cost, but below average cost, then the firm should continue producing in the short run, but exit in the long run.

We call the point where the marginal cost curve crosses the average variable cost curve the shutdown point.

8.3 Entry and Exit Decisions in the Long Run

In the long run, firms will respond to profits through a process of entry, where existing firms expand output

and new firms enter the market. Conversely, firms will react to losses in the long run through a process of exit,

in which existing firms cease production altogether. Through the process of entry in response to profits and

exit in response to losses, the price level in a perfectly competitive market will move toward the zero-profit
210 8 • Self-Check Questions
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