Question

Illustrate short run profit maximization scenerio of a competitive firm in case of loss.

Answer 1

Solution:

In case a competitive firm is making losses in the short run, it means that it is operating at the level where the Average Total Cost (ATC) is greater than the price. At the point where ATC is greater than the Price which is equal to D, AR, and MR, the competitive firm will be making short-run losses.

For a competitive firm to maximize its profit in the short run, it should produce that quantity where marginal revenue = marginal cost. If the firm’s ATC is below the market price, then the competitive firm will make a profit.

 

This is illustrated by the below graph: