The firm in the figure above is ________ that is equal to ________.
A) making an economic profit; $5.14 × 7
B) making an economic profit; $3.00 × 7
C) incurring an economic loss; $5.14 × 7
D) incurring an economic loss; ($5.14 - $3.00) × 7
E) making an economic profit; ($5.14 - $3.00) × 7

Question

Quizplus · Accepted Answer

The firm is producing at a quantity of 7 where the marginal cost (MC) intersects with the price (P) and the MC is equal to $5.14. However, at this price level ($3.00), the firm is not covering all of its costs as the average total cost (ATC) is higher than the price level. Thus, the firm is incurring an economic loss. The calculation for the total economic loss is ($5.14 - $3.00) x 7, which equals $14.98. Therefore, choice D is the correct answer.

The Firm in the Figure Above Is ________ That Is