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Graphically depict all relevant cost curves

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Suppose a firm has a production technology which results in the commonly seen outcome of "U-shaped" Average Variable Cost (AVC), Average Total Cost (ATC) and Marginal Cost (MC). Further, suppose this firm sells its product in a market where the price of the good is externally set at P0. That is, the price is given to the firm and the firm cannot impact that price. Finally, for the entirety of this set of questions (7-9), assume we are in the Short Run for this firm.

In graphing responses to Questions 7 through 9, put $ on the vertical axis and lower-case q (firm output) on the horizontal axis.

Consider a scenario when the firm operates at a profit-maximizing level (produces a proft-maximizing quantity) yet (a) has negative profits at this outcome and (b) it does not choose to shut down.

  • Graphically depict all relevant cost curves (ATC, AVC, AFC, MC) and label them as well as the price P0 and the equilibrium q0. 
  • Graphically indicate the area associated with negative profits made by the firm. Explain why this area represents negative profits.
  • Explain the decision to keep producing in the face of negative profits.

Reference no: EM132461508

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