Figure 12-4

Figure 12-4 shows the cost and demand curves for a profit-maximizing firm in a perfectly competitive market.
-Refer to Figure 12-4.If the market price is $30, should the firm represented in the diagram continue to stay open?

Question

Figure 12-4
  
Figure 12-4 shows the cost and demand curves for a profit-maximizing firm in a perfectly competitive market.
-Refer to Figure 12-4.If the market price is $30, should the firm represented in the diagram continue to stay open?

Quizplus · Accepted Answer

At a market price of $30, the firm's total revenue is $30*2= $60, which is above its variable cost of $40 (sum of MC at Q=2). However, it still falls short of covering its total cost of $80 (sum of ATC at Q=2), resulting in a loss of $20. But since the firm can cover part of its fixed cost, it would be better off continuing to stay open in the short run, rather than shutting down and incurring a loss equal to its total fixed cost.

Figure 12-4 Figure 12-4 Shows the Cost and Demand Curves for a and Demand