Consider the diagram on the right that depicts the cost curves for a perfectly competitive firm. The market price (and marginal revenue) faced by this firm is $7.

a. The owner of the firm finds that marginal cost and marginal revenue are equal at 11 units of output. If the owner produces 11 units, what will his profit or loss be?
b. Suppose instead that the owner decides to produce nothing-he idles the production line and cuts his variable costs to zero. What will his profit or loss be?
c. If the price is $7, is it better for the firm to produce 11 units, or nothing at all? What if the price is $9?

Transcribed Image Text:

Price & cost (S/unit) $10.25 9 MC ATC AVC 7.5 0 Quantity