Refer to the accompanying graph. If this firm is a price taker and the price of each unit of output is $9, then at its profit-maximizing level of output, this firm will earn a ________ of ________.
A)loss; $60
B)loss; $300
C)profit; $495
D)profit; $900

Question

Refer to the accompanying graph. If this firm is a price taker and the price of each unit of output is $9, then at its profit-maximizing level of output, this firm will earn a ________ of ________. 
A)loss; $60 
B)loss; $300 
C)profit; $495 
D)profit; $900

Quizplus · Accepted Answer

Since $9 is less than the minimum of the AVC curve, this firm should shut down when the price is $9. As a result, the firm's total revenue will be zero, and the firm will earn a loss equal to its fixed cost. To find this firm's fixed cost, note that FC = TC − VC = (ATC − AVC)× Q. In addition, note that when the firm produces 60 units of output, its fixed cost is $300 = ($16 − $11)× 60. Since fixed cost doesn't depend on the level of output, when the firm shuts down it will earn a loss of $300.

Refer to the Accompanying Graph