Chapter 23, Problem 18P

To determine

Consider the below figure. Why does the output rate in panel (b) remain at q_e units per hour even if the position of the AC curve shifts from AC1 to AC3? Following an increase in fixed costs, and how do we know that economic profits then becomes negative?

Concept Introduction:

Economic profit: The economic profit a firm is calculated by deducting total revenue from total cost. The total costs consists of both implicit and explicit costs. Explicit cost is the ordinary costs of the firm like rent, salaries to the employees etc. On the other hand implicit cost is also known as imputed cost which describes the opportunity cost of anything. In a perfect competitive market, if the price is greater than the average total cost the firm, it will get a positive economic profit. If it is below the average total cost curve, the firm will incur losses. If the price were equal to the average total cost curve, it is called the breakeven point.

Negative Economic profit: Negative economic profit is a situation in which the total cost of the firm exceeds the total revenue of the firm. In this situation, the firm experience losses that will force them to leave the market.