The use of marginal cost pricing in Figure 27.1 will result in

Question

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Marginal cost pricing means setting the price equal to the marginal cost of production. In Figure 27.1, the marginal cost curve intersects with the demand curve at point A, which corresponds to a price of $10 and a quantity of 60. However, the average total cost curve (ATC) intersects with the demand curve at point B, which corresponds to a price of $15 and a quantity of 80. Therefore, if the firm sets the price at the marginal cost, it will only cover its variable costs and will incur losses equal to the rectangle ABED. This is because the price is below the ATC, which includes both variable and fixed costs. Hence, the use of marginal cost pricing in Figure 27.1 will result in economic losses.

The Use of Marginal Cost Pricing in Figure 27