44.

The provided graph gives short-run data for a firm. Which of the following statements is correct?

A. Production is profitable only when price is above P3.
B. Average fixed cost is (P3 - P1) at output Q4.
C. The firm will produce an output of Q1 when price is P1.
D. At price P1, the firm will not supply any quantity.

Question

44.

The provided graph gives short-run data for a firm. Which of the following statements is correct?

A. Production is profitable only when price is above P3.
B. Average fixed cost is (P3 - P1) at output Q4.
C. The firm will produce an output of Q1 when price is P1.
D.  At price P1, the firm will not supply any quantity.

BlackTom AI · Accepted Answer

A firm in the short run will produce only if the market price covers its average variable cost (AVC) — otherwise it should shut down and supply zero. Profitability requires price above average total cost (ATC); average fixed cost (AFC) equals ATC minus AVC.

Step 1 — key concepts:
- Shutdown rule: produce if P ≥ minimum AVC; if P < min AVC, shut down (supply = 0).
- Profit condition: positive economic profit when P > ATC at the chosen output.
- AFC = ATC − AVC (vertical distance between ATC and AVC at a given Q).

Step 2 — apply to the graph:
- The horizontal line MR1 at price P1 intersects the MC curve at the output labeled Q1, but that intersection lies below the AVC curve. That means at Q1 the price (P1) is less than AVC at Q1.
- Because P1 < AVC (and P1 is below the AVC minimum), the firm cannot cover its variable costs by producing. The optimal short-run decision is to shut down and produce zero output.

Step 3 — intermediate formulas/logic:
- Shutdown condition check: Is P1 ≥ min AVC? No — visual shows P1 below AVC. Therefore supply = 0.
- AFC at any Q: AFC = ATC − AVC. It is not equal to a difference between two arbitrary horizontal price lines unless those lines exactly equal ATC and AVC at that Q.

Step 4 — why D is correct:
- D states “At price P1, the firm will not supply any quantity.” This matches the shutdown rule because P1 < AVC, so the firm shuts down (supply = 0).

Step 5 — why the other choices are wrong:
- A: “Production is profitable only when price is above P3” is false — profit depends on P relative to ATC at the profit-maximizing Q, not simply P3.
- B: “AFC is (P3 − P1) at Q4” is incorrect because AFC = ATC − AVC at Q4; P3 and P1 are price levels, not necessarily equal to ATC or AVC differences.
- C: “The firm will produce Q1 when price is P1” is wrong because although MC and MR1 intersect at Q1, P1 < AVC there so the firm shuts down instead.

Conclusion: The correct answer is D, as given.

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