On a monopoly diagram, which area represents operating but at a loss?

• A. Above the line where ATC = MC
• B. Below the line where MC = AVC
• C. Between MC = ATC and MC = AVC
• D. Above the line where MC = AVC

Answer: (C)

The key idea is the short-run shutdown decision: a firm should operate if price covers its average variable costs. If price is between average variable cost and average total cost, the firm still produces but incurs a loss (it covers variable costs and contributes to fixed costs, but not all fixed costs). On a monopoly diagram with MC, AVC, and ATC, this situation occurs over the range of output between the points where MC intersects AVC and where MC intersects ATC. That region corresponds to prices that lie between AVC and ATC, so the firm is operating yet not breaking even. Hence the area between those two intersection points—the segment where MC lies between AVC and ATC—represents operating but at a loss.