The following figure shows the cost curves of a firm producing good X.

-Refer to Figure. The area EFGH is:
A)the loss incurred by the firm when market price is $3.5.
B)the profit earned by the firm when the market price is $3.5.
C)the loss incurred by the firm when the market price is $5.
D)the revenue earned by the firm when the market price is $5.

Question

The following figure shows the cost curves of a firm producing good X.
 
-Refer to Figure. The area EFGH is:
A)the loss incurred by the firm when market price is $3.5. 
B)the profit earned by the firm when the market price is $3.5. 
C)the loss incurred by the firm when the market price is $5. 
D)the revenue earned by the firm when the market price is $5.

Quizplus · Accepted Answer

The area EFGH represents the loss incurred by the firm when the market price is $3.5. This is because at this market price, the firm's marginal cost (MC) is higher than the market price, so it is producing and selling at a loss. The area EFGH represents the difference between the total cost (TC) and the total revenue (TR) at the given market price, which is a negative value indicating a loss.

The Following Figure Shows the Cost Curves of a Firm