Question

This Question: 10 pts 8 of 28 (0 complete) 1) On the graph at the right draw a perfectly compettive firm that is making a loss, but will keep producing in the short-run Be sure to include the ATC AVC MR and MC curves Hint use the 3 point drawing tool to draw a line that has a curve in it Carefully label everything 2) Draw a point at the profit maxizing quantity and price 3) Finally, shade the loss area on the graph using the appropriate shading tool

Answer 1

Ans. The profit maximizing quantity (Q) in a perfectly competitive market is where marginal revenue (MR) equals marginal cost (MC) and corresponding to this quantity price (P) equals marginal cost. (profit maximizing quantity and price is represented by point A)

Price MC ATC AVC С P Loss MR Q Quantity

Loss = (C - P) *Q [Here, C = ATC at profit maximizing quantity]

The firm will not shutdown even if it is incurring losses if P > AVC because it will still be qble to cover the variable cost and a part of fixed cost, so, its loss is part of fixed cost but if it shuts down, its loss will increase to full fixed cost. Thus, it is better to produce and not shutdown in short run and enter long run.

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