At an output level of 500 units, ATC = $10, AVC = $5, MR = $3 and MC = $3, the result for the perfectly competitive firm will be:
A) making a loss of ($5 - $3) 500 = $1000.
B) a decrease in output, so MC MR.
C) making a short-run loss of $2500.
D) an increased output, so MR MC.

Question

At an output level of 500 units, ATC = $10, AVC = $5, MR = $3 and MC = $3, the result for the perfectly competitive firm will be:
A) making a loss of ($5 - $3) 500 = $1000.
B) a decrease in output, so MC > MR.
C) making a short-run loss of $2500.
D) an increased output, so MR > MC.

Quizplus · Accepted Answer

The firm is making a short-run loss because its average total cost (ATC) of $10 is greater than the market price (MR = $3). The loss per unit is $10 - $3 = $7, and for 500 units, the total loss is $7 * 500 = $3500, not $2500 as stated. However, since none of the other options are correct under the given conditions, option C is the closest to describing the firm's situation, despite the numerical error in the explanation.

At an Output Level of 500 Units, ATC = $10