Question

Based on the graph below, notice there are cost lines and four different price levels. Answer the following A- D questions: MC P-MR-ID ATC AYC Quantity (A)Which point (a-g) on the graph is the profit-maximizing production level for a firm making positive economic profits? level? (B) Ifthis firm was in long-run equilibrium, which point would represent the profit-maximizing production (C) If the firm was incurring losses but would operate in the short run, which point would represent the loss- minimizing production level? (D) Which point represents a case in which the firm would shutdown?

Answer 1

Answer
a)
a firm makes the profit if the price is greater than the average total cost at the profit-maximizing output level.
the firm maximize profit by producing at MC=P
the point "b" shows the positive profit production level
P>ATC at output level of point b.

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b)
A long-run equilibrium is at P=min(ATC)
the average total cost is minimum at point "a", the long run equilibrium production is at point "a"

c)
A firm making loss means producing below ATC and it is operative in short run if the P>AVC.
the point between ATC and AVC is the loss-minimizing point if the firm is operating in the short run
the point is "d"

d)
A firm shutdown if the price is below AVC and the point below AVC curve is point "c"
the firm should shutdown if the price is below AVC.