Chapter 8: Problem 20

What two lines on a cost curve diagram intersect at the zero-profit point?

Short Answer

Expert verified

The two lines on a cost curve diagram that intersect at the zero-profit point are the Average Total Cost (ATC) line and the Demand curve or Price line (P). At this intersection, the firm covers all its costs without making any profit or incurring any loss.

Step by step solution

Understand the Average Total Cost Line

The Average Total Cost (ATC) line in a cost curve diagram represents the average cost per unit of a product when a firm produces at a certain level. It includes both variable and fixed costs. It is generally U-shaped, as average total costs initially decrease as production increases, but then average total costs increase due to diminishing returns.

Understand the Demand Curve or Price Line

The Demand curve or Price line (P) represents the price at which a firm can sell its products at different quantity levels. In a competitive market, producers are price takers, so the price remains constant at different levels of output. The price line is therefore a horizontal line, parallel to the quantity axis.

Identify the Zero-Profit Point

The zero-profit point is the point where a firm's revenues equal its total cost. A firm is in a break-even situation, as it covers all its costs without making any profit or incurring any loss. This happens when the price line (P) is equal to the ATC line, so at this point, the two lines intersect.

Illustrate the Intersection of ATC and Price Line

In a cost curve diagram, the intersection of the ATC and the Demand curve or Price line shows the zero-profit point. At this point, the firm produces at an output level that minimizes its average total cost, and the price at which it sells its products exactly covers these costs. The firm receives no profit but also incurs no loss. In conclusion, the Average Total Cost (ATC) line and the Demand curve or Price line (P) are the two lines on a cost curve diagram that intersect at the zero-profit point. At this point, the firm covers all its costs without making any profit or incurring any loss.

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