A firm in a perfectly competitive industry is making losses in the short run.
(i) Sketch a ‘typical' firm's Average Cost and Marginal Cost curves and in the diagram show a possible price at which the firm would produce in the short run, but make losses. [Hint: how does the price compare with the firm's average variable cost?]
(ii) Now explain what will happen in the industry as a whole in response to the losses that firms are experiencing. How does the market price change and what happens to profits?