Figure 14-1

Suppose that a firm in a competitive market has the following cost curves:

Refer to Figure 14-1. If the market price falls below $6, the firm will earn

Question

Figure 14-1

Suppose that a firm in a competitive market has the following cost curves:

​

Refer to Figure 14-1. If the market price falls below $6, the firm will earn

BlackTom AI · Accepted Answer

To begin analyzing the question, we need to compare the market price to the firm’s cost curves shown in the figure. The question states: if the market price falls below $6, what will the firm earn in the short run?
Option A: zero economic profits in the short run. This would occur if price were exactly at the minimum of ATC, where total revenue equals total cost. However, the scenario specifies price below $6, and from typical cost curves the price below $6 is not at ATC minimum; at such prices the firm would incur losses rather than breaking even. Therefore this option is not consistent with P < 6.
Option B: negative economic profits in the short run but remain in business. This would be true if price were between the AVC and ATC curves, so that the firm incurs losses but covers variable costs and keeps operating. If P < 6 is still above the minimum AVC, the firm would operate; if P falls further below the minimum AVC, the firm would shut down. The key question is whether P < 6 lies below AVC. The diagram and typical cost shapes suggest that at P below 6, the price intersects the short-run average variable cost (AVC) at a level where the firm would not cover its variable costs, implying shutdown rather than continuing to operate with losses. Hence this option may misstate the shutdown decision if P is below AVC.
Option C: positive economic profits in the short run. Positive profits require price to exceed ATC. Since the price is below 6, which is well below the typical ATC at the relevant quantity in the graph, this option is clearly incorrect.
Option D: negative economic profits in the short run and shut down. This option states two consequences: profits are negative (losses) and, crucially, the firm shuts down in the short run when P < the AVC minimum, meaning it cannot cover its variable costs. Given the position of P < 6 relative to the AVC curve in the figure, the firm would not cover its variable costs and would shut down, yielding a short-run loss equal to fixed costs but avoiding variable costs.
In summary, while a price below the minimum of ATC implies losses, the critical distinction is whether the price also falls below the minimum AVC. The graph indicates that at P < 6 the firm cannot cover its variable costs, leading to shutdown rather than continuing production with losses. Therefore, the statement describing negative profits in the short run and shutdown matches the typical shutdown rule in the short run for a competitive firm when price is below the AVC minimum.

Figure 14-1 Suppose that a firm in a competitive market has the following cost curves: Refer to Figure 14-1. If the market price falls below $6, the firm will earn

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Figure 14-1 Suppose that a firm in a competitive market has the following cost curves: ​ Refer to Figure 14-1. If the market price falls below $6, the firm will earn