Question

Explain what causes a perfectly competitive firm to suffer losses.

Answer 1

$TR=0P^*EQ^*$

$TC=0ABQ^*$

Profit(Loss)$=P^*ABE$

$=0P^*EQ^*-0ABQ^*$

A perfectly competitive firm incurs a loss or subnormal profit in the short run because the average cost of producing this output is more than the ruling market price hence $TR<TC.$