Figure 14-2
Suppose a firm operating in a competitive market has the following cost curves:
-Refer to Figure 14-2. If the market price is Pd, in the short run the firm will earn
A)positive economic profits.
B)negative economic profits but will try to remain open.
C)negative economic profits and will shut down.
D)zero economic profits.

Question

Figure 14-2
Suppose a firm operating in a competitive market has the following cost curves: 
-Refer to Figure 14-2. If the market price is Pd, in the short run the firm will earn
A)positive economic profits. 
B)negative economic profits but will try to remain open. 
C)negative economic profits and will shut down. 
D)zero economic profits.

Quizplus · Accepted Answer

In the short run, the firm will produce at the quantity where the marginal cost (MC) equals the market price Pd. In this case, the firm will produce Q1 units and charge a price of Pd. However, at this quantity, the average total cost (ATC) is greater than Pd. This means that the firm is incurring losses and earning negative economic profits. If the firm shuts down in the short run, it can avoid incurring variable costs and limit its losses to its fixed costs. In this case, the fixed costs are less than the losses that the firm would incur from producing and selling at a price below its ATC. Therefore, the firm will shut down in the short run and earn negative economic profits.

Figure 14-2 Suppose a Firm Operating in a Competitive Market Has the Has