Question

Use the graph to answer the questions that follow.

a. At what prices is the firm making an economic profit, breaking even, and experiencing an economic loss?

b. At what prices would the firm shut down?

c. At what prices does the firm's short-run supply curve exist? At what prices does the firm's long-run supply curve exist?

Answer 1

Answer)

a.) economic profit = P₅ and P₆

Breaking Even = P₄

Economic loss = P₁ , P₂ and P₃

b.) At price P₁ firm would shut down as its even lower than minimum level of AVC.

c.) The firm's short‐run supply curve is the portion of its marginal cost curve that lies above its average variable cost curve. so, for prices P₃ , P₄, P₅, P₆ short run supply cuirve exist.

In the long run, new firms will enter the industry attracted by the positive profits. The market supply curve will shift back until each firm is producing at the lowest point of its average cost curve So, for prices P₄, P₅, P₆ long run supply curve exist.