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 atP₀. 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-caseq(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 outcomeand(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 priceP₀and the equilibriumq_0.
• 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.