The use of marginal cost pricing in Figure 27.1 will result in

Question

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Marginal cost pricing occurs when the price of a good or service is set at the cost of producing one additional unit. In Figure 27.1, marginal cost intersects with demand at a quantity of Q2 and a price of P2. This means that if the firm sets its price at marginal cost, it will produce Q2 units and earn revenue equal to P2 multiplied by Q2. However, the firm's average total cost (ATC) curve is above the demand curve, meaning that at the quantity where marginal cost equals price (Q2), the firm will be incurring economic losses because the price it is receiving is lower than its average total cost. Therefore, the use of marginal cost pricing in this situation will result in economic losses.

The Use of Marginal Cost Pricing in Figure 27