Figure 7-7 Figure 7-7 shows cost and demand curves facing a profit-maximising, perfectly competitive firm. -Refer to Figure 7-7.At price P₂,the firm would A) lose an amount equal to its fixed cost. B) lose an amount more than fixed cost. C) lose an amount less than fixed cost. D) break even.

Question

Quizplus · Accepted Answer

At price P₂, the firm's marginal cost curve (MC) intersects its marginal revenue curve (MR) at output Q1. At this output level, the firm's total revenue (TR) is less than its total variable cost (TVC), but greater than its total fixed cost (TFC). Thus, the firm incurs a loss equal to its total fixed cost (TFC). Since TFC is a sunk cost and the firm would incur this cost regardless of whether it produced or not, the best choice for the firm is to produce at this level to minimize its loss. Therefore, the correct answer is C, lose an amount less than fixed cost.

Figure 7-7 Figure 7-7 Shows Cost and Demand Curves