Figure 7.4 Figure 7.4 shows the cost and demand curves for a profit-maximising firm in a perfectly competitive market.
-Refer to Figure 7.4.If the market price is $30,should the firm represented in the diagram continue to stay in business?
A) No, it should shut down because it is incurring a loss.
B) No, it should shut down because it cannot cover its variable cost.
C) Yes, because it is covering part of its fixed cost.
D) Yes, because it is making a profit.

Question

Figure 7.4  Figure 7.4 shows the cost and demand curves for a profit-maximising firm in a perfectly competitive market.
-Refer to Figure 7.4.If the market price is $30,should the firm represented in the diagram continue to stay in business?
A) No, it should shut down because it is incurring a loss. 
B) No, it should shut down because it cannot cover its variable cost. 
C) Yes, because it is covering part of its fixed cost. 
D) Yes, because it is making a profit.

Quizplus · Accepted Answer

If the market price is $30, the firm's quantity supplied is 80 units, which is less than its minimum efficient scale (MES) of 100 units. Therefore, it incurs a loss equal to $3 per unit times 80 units, which is $240. However, this loss is less than its fixed cost of $300, so the firm should continue to stay in business to cover part of its fixed cost. Therefore, the best choice is C.

Figure 74 Figure 7