margin is positive and the firm will earn profits. Conversely, if the market price is lower than the average cost

of production, the profit margin is negative and the firm will suffer losses. You might think that, in this

situation, the firm may want to shut down immediately. Remember, however, that the firm has already paid for

fixed costs, such as equipment, so it may continue to produce for a while and incur a loss. Table 8.3 continues

the raspberry farm example. Figure 8.5 illustrates the three possible scenarios: (a) where price intersects

marginal cost at a level above the average cost curve, (b) where price intersects marginal cost at a level equal to

the average cost curve, and (c) where price intersects marginal cost at a level below the average cost curve.

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8.2 • How Perfectly Competitive Firms Make Output Decisions 195

FIGURE 8.5 Price and Average Cost at the Raspberry Farm In (a), price intersects marginal cost above the average
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