Chapter 59, Problem 1FRQ

To determine

Loss minimizing quantity.

Explanation of Solution

  

In the above diagram, MC is the marginal cost, ATC is the average total cost, AVC is the average variable cost and MR is the marginal revenue which is also the price line. Q* is the minimizing loss quantity and the shaded area is the loss where the average total cost is higher than the price which means the firm suffers a loss. And, MC cuts the price line and the average total cost is higher than the marginal cost or price.

Economics Concept Introduction

Introduction:

A perfectly competitive firm’s average total cost curve and average variable cost curve are U-shaped, and the price line is horizontal which means the firm can sell as much as output at the given price. The firm occurs loss when it is not able to cover average variable cost and loss will be minimum where MC cuts the price line and average total cost is higher than marginal cost or price