Question

Suppose that the market for dress shirts is a competitive market. The following graph shows the daily cost curves of a firm operating in this market. Hint: After placing the rectangle on the graph, you can select an endpoint to see the coordinates of that point. 50 45 Profit or Loss 40 35 30 25 20 AVC 10 0 46 810 2 4 16 1820 QUANTITY (Thousands of shirts per day) On the preceding graph, use the blue rectangle (circle symbols) to shade the area representing the firm's profit or loss if the market price is $15 and the firm chooses to produce the quantity you already selected. Note: In the following question, enter a positive number, even if it represents a loss The area of this rectangle indicates that the firm'swould be S thousand per day in the short run.

Answer 1

When P=$15 per shirt ,in the short run this firm will choose to produce 8 thousands shirts per day where P=MC.

We can see in the graph that at this output level , P<ATc , this implies that firm is incurring loss in the short run.

The area of the rectangle indicates that the firm's loss would be $ (29-15)8= $112 thousand per day in the short run.Because at Q=8 thousand , ATC = $29 .