![]() ![]() Price and Average Cost at the Raspberry Farm. In (a), price intersects marginal cost above the average cost curve. Figure 1 illustrates three situations: (a) where at the profit maximizing quantity of output (where P = MC), price is greater than average cost, (b) where at the profit maximizing quantity of output (where P = MC), price equals average cost, and (c) where at the profit maximizing quantity of output (where P = MC), price is less than average cost.įigure 1. Remember, however, that the firm has already paid for fixed costs, such as equipment, so it may make sense to continue to produce and incur a loss. You might think that, in this situation, the farmer may want to shut down immediately. ![]() Conversely, if the price that a firm charges is lower than its average cost of production, the firm’s profit margin is negative and it is suffering an economic loss. If the price that a firm charges is higher than its average cost of production for that quantity produced, then the firm’s profit margin is positive and it is earning economic profits. Profits and Losses with the Average Cost Curveĭoes maximizing profit (producing where MR = MC) imply an actual economic profit? The answer depends on firm’s profit margin (or average profit), which is the relationship between price and average total cost. Identify and explain the firm’s break-even point. ![]()
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