The figure given below shows the revenue and cost curves of a perfectly competitive firm.Figure 10.1

-A perfectly competitive firm incurs a loss in the short run, if at the profit maximizing level of output:

Question

The figure given below shows the revenue and cost curves of a perfectly competitive firm.Figure 10.1
 
-A perfectly competitive firm incurs a loss in the short run, if at the profit maximizing level of output:

Quizplus · Accepted Answer

In order for a firm to incur a loss, its revenue must be less than its costs. This occurs when the average revenue curve (which is the same as the demand curve for a perfectly competitive firm) lies below the average cost curve. This means that the firm is not earning enough revenue to cover all of its costs, including fixed costs, and is therefore making a loss. The marginal revenue curve and the marginal cost curve are important in determining the profit-maximizing level of output, but do not directly affect whether or not the firm is making a loss.

The Figure Given Below Shows the Revenue and Cost Curves