Figure 6.2
-Figure 6.2 shows the cost structure of a firm in a perfectly competitive market. Suppose that market price falls to $6. If the firm produces at an output level that causes it to suffer an economic loss of $120, its average total cost (X) is

Question

Quizplus · Accepted Answer

If the market price falls to $6, the firm will produce at the output level where marginal cost equals marginal revenue (MC=MR), which is where the firm's supply curve intersects with the market price of $6. From the graph, we can see that this output level is Q=14. At this output level, the firm incurs an average total cost of $7.50 (point A on the graph), which is higher than the market price of $6, resulting in an economic loss of $1.50 per unit produced.

If the firm produces Q=14, its total cost would be $105 (14*$7.50), while its total revenue would be $84 (14*$6), resulting in an economic loss of $21. Therefore, to minimize the economic loss, the firm should continue to produce at Q=14, where its average total cost is the lowest in the short run, and try to cover some of its fixed cost until the market price rises above its average total cost.

Figure 6.2 -Figure 6.2 Shows the Cost Structure of a Firm in Firm