Question

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multiple choice question
based on the chart, what happens at a price p3 and an output of q3?
the firm incurs a loss greater than its fixed cost and should shut down production.
the firm incurs a loss but covers part of its fixed cost.
the firm earns a normal profit (breaks even).
the firm earns an economic profit.

Explanation:

In economics, when analyzing firm - cost and revenue relationships on a graph, if at a given price and output, the average total cost is above the price, the firm incurs a loss. If the price is above the average variable cost but below the average total cost, the firm incurs a loss but covers part of its fixed cost. Without seeing the actual cost - revenue curves in detail, we assume basic economic principles of firm behavior. If the price is below the average variable cost, the firm should shut down as the loss is greater than fixed cost. If price equals average total cost, the firm breaks even. If price is above average total cost, the firm earns an economic profit.

Answer:

The firm incurs a loss but covers part of its fixed cost.