crossed by the average cost and average variable cost curves. We call the point where MC crosses AC the break even

point. If the firm is operating where the market price is at a level higher than the break even point, then price will be

greater than average cost and the firm is earning profits. If the price is exactly at the break even point, then the firm

is making zero profits. If price falls in the zone between the shutdown point and the break even point, then the firm

is making losses but will continue to operate in the short run, since it is covering its variable costs, and more if price

is above the shutdown-point price. However, if price falls below the price at the shutdown point, then the firm will

shut down immediately, since it is not even covering its variable costs.

First consider the upper zone, where prices are above the level where marginal cost (MC) crosses average cost
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