FIGURE 10.6 The P= MC rule and the competitive firm's short-run supply curve. Application of the P= MC rule, as modified by the shutdown case, reveals that the (solid) segment of the firm's MC curve that lies above AVC is the firm's short-run supply curve. More specifically, at price P, P= MC at point a, but the firm will produce no output because P, is less than minimum AVC. At price P, the firm will operate at point b, where it produces Q, units and incurs MC ATC e P5 MR5 Break-even point (normal profit) AVC d MR4 loss equal to its total fixed cost. At P, it operates at point c, where output is Q, and the loss is less than total fixed cost. With the price of P, the firm MR3 operates at point d, in this case the firm earns a normal profit because at output Q price equals ATC. At price Ps the firm operates at point e and maximizes its economic b MR2 Shutdown point (if P is below) profit by producing Q, units. MR1 Q2 Q3Q, Q5 Quantity supplied Cost and revenues (dollars)
1. Which of the following might increase product
3. At P4: a. this firm has no economic profit. b. this firm will earn only a normal profit and thus will shut down. c. MR4 will be less than MC at the profit-maximizing output. d. the profit-maximizing output will be Q5. 4. Suppose P4 is $10, P5 is $15, Q4 is 8 units, and Q5 is 10 units. This firm’s: a. supply curve is elastic over the Q4–Q5 range of output. b. supply curve is inelastic over the Q4–Q5 range of output. c. total revenue will decline if price rises from P4 to P5. d. marginal-cost curve will shift downward if price falls from P5 to P4.
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