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The automaker General Motors (GM) incurred heavy losses (negative profits) leading up to its bankruptcy in 2009. If GM was earning losses, why did it choose to produce in the short-run instead of shutting down? What happened to GM in the long-run? Did GM continue to produce or exit the market? Why?

  1. Short-Run Decisions vs. Long-Run Decisions:

 

 

Firms have two decisions in the short-run:

 a) Produce (Q>0), or

 b) Shut down (Q=0)

 

Firms also have two decisions in the long-run:

 a) Produce (Q>0), or 

 b) Exit (leave the market and produce something else)

 

 

The automaker General Motors (GM) incurred heavy losses (negative profits) leading up to its bankruptcy in 2009.  If GM was earning losses, why did it choose to produce in the short-run instead of shutting down?  What happened to GM in the long-run?  Did GM continue to produce or exit the market?  Why? 

 

 

The recording artist K-Fed was married to Britney Spears and is the father of her children.  K-Fed organized a tour in 2006 to promote his solo album Playing With Fire.  Unfortunately for K-Fed his ticket sales were weak and many performances were cancelled.  Why do you think K-Fed’s promoters decide to “shut down”?  What happened to K-Fed in the long-run?  Did K-fed continue to produce (i.e. make music and tour) or exit the market (try something else)?  Why? 

 

Notes

 1) GM received a large bailout from the U.S. federal government.  Many firms in GM’s financial position would have exited the market (i.e. gone bankrupt).

 2) K-Fed couldn’t even give his concert tickets away for free.  Look it up if you don’t believe me.

 

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