Consider the following short- run cost curves for a perfectly competitive firm. FIGURE 9- 2
-Refer to Figure 9- 2. If the market price is $2, the firm will
A) shut down and make zero profit.
B) produce 300 units and make a loss equal to total variable cost.
C) shut down and suffer a loss equal to its fixed cost.
D) produce 200 units and make a loss equal to its total fixed cost.
E) continue operating in the short run and suffer a loss that is less than its fixed cost.

Question

Consider the following short- run cost curves for a perfectly competitive firm.  FIGURE 9- 2
-Refer to Figure 9- 2. If the market price is $2, the firm will
A) shut down and make zero profit. 
B) produce 300 units and make a loss equal to total variable cost. 
C) shut down and suffer a loss equal to its fixed cost. 
D) produce 200 units and make a loss equal to its total fixed cost. 
E) continue operating in the short run and suffer a loss that is less than its fixed cost.

Quizplus · Accepted Answer

The firm will continue operating in the short run and suffer a loss that is less than its fixed cost. At a price of $2, the firm's total revenue is $600 (2 x 300). Its total variable cost is $400 (2 x 200). So its total loss is $200 ($600 - $400). This loss is less than its fixed cost of $300.

Consider the Following Short- Run Cost Curves for a Perfectly