The diagram below depicts the cost curves for a perfectly competitive jump drive producer that is currently operating at a loss.

a. Suppose the market price of jump drives is $7. In the graph, outline an area that represents this firm's losses if it produces where MR = MC.
b. If the firm in (a) instead shuts down and produces zero units, it will lose only its fixed costs. Outline an area that represents this firm's fixed costs.
c. Which area is larger-its losses from producing where MR = MC, or its losses from producing zero units of output? What should the firm do?
d. Do your answers to (a), (b), and (c) change if the price of jump drives is $11 rather than $7?

Transcribed Image Text:

Price & cost (S/unit) ATC $20 MC 18 - 16 AVC 12 - 10 Quantity