Consider the graph below. If the price facing this firm was $2, what would their profits be? Note: if the firm would be better off shutting down than producing, the answer should be 0 (zero). Profit = _____

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BlackTom AI · Accepted Answer

First, identify the key decision rule for a competitive firm: it should compare the price (P) to its average variable cost (AVC) at the output level it would choose if it produced.
Next, recall that the shutdown decision hinges on whether P is at least as large as AVC at the profit-maximizing or chosen output. If P < AVC, the firm minimizes losses by shutting down and producing zero output.
Looking at the graph, the price facing the firm is P = 2. At the potential operating outputs shown, the AVC curve lies above 2 for the relevant quantities near the optimal production point; in other words, at the output the firm would produce if it operated, the variable cost per unit is higher than the price.
Since P < AVC at the operating output, the firm would incur losses that exceed fixed costs if it produced; shutting down eliminates these variable costs and yields zero profit.
Therefore, the appropriate outcome is that profits are zero when the price is $2, because the firm chooses to shut down rather than produce at a loss.

SA.999.600.91.SU25 Module 5 Cumulative Exam

Consider the graph below. If the price facing this firm was $2, what would their profits be? Note: if the firm would be better off shutting down than producing, the answer should be 0 (zero). Profit = _____

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SA.999.600.91.SU25 Module 5 Cumulative Exam

Consider the graph below. If the price facing this firm was $2, what would their profits be? Note: if the firm would be better off shutting down than producing, the answer should be 0 (zero). Profit = _____

View Explanation

Log in for full answers

Similar Questions

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