Figure 14-4
Suppose a firm operating in a competitive market has the following cost curves:
-Refer to Figure 14-4. At which price range will the firm continue to operate in the short run but earn negative profits?
A)any price higher than P4
B)any price higher than P3 but less than P4
C)any price higher than P2 but less than P3
D)any price lower than P1

Question

Figure 14-4
Suppose a firm operating in a competitive market has the following cost curves: 
-Refer to Figure 14-4. At which price range will the firm continue to operate in the short run but earn negative profits?
A)any price higher than P4 
B)any price higher than P3 but less than P4 
C)any price higher than P2 but less than P3 
D)any price lower than P1

Quizplus · Accepted Answer

In the short run, the firm will operate where Price (P) is equal to or greater than Average Variable Cost (AVC) but less than Average Total Cost (ATC). This is shown by the shaded area between AVC and ATC (which represents the average fixed cost, AFC). At P1, the firm will shut down because Price is below AVC. At P2, the firm will continue to produce because Price is between AVC and ATC, but it will earn negative profits because Price is below ATC. At P3, the firm will earn positive profits because Price is above ATC. At P4, the firm will produce at its profit-maximizing level where Marginal Cost (MC) equals Price, and earn positive profits. Therefore, the price range where the firm will continue to operate in the short run but earn negative profits is any price higher than P2 but less than P3, which is choice C.

Figure 14-4 Suppose a Firm Operating in a Competitive Market Has the Has