Answer
a) The price is greater than the average variable cost, and the price is less than the average total cost.
b) Please see the graph.
c) Firms will leave the market, more units will be produced by each firm, and the price will be higher. However, there will be fewer units in the market overall.
Work Step by Step
a) Since firms are losing money, then the average total cost is greater than the price of the item. Since firms are making output, the average variable cost must be less than the price of the item. Also, since firms are maximizing profits in a competitive market, the price must match the marginal cost of the item.
b) Currently, the price of the item is less than average total costs and greater than average variable costs. The price of the item is at $P_{0}$, and the equilibrium quantity is $Q_{0}$. The graph on the left is for the firm, and the graph on the right is for the market.
c) Since there are losses by firms in the industry, some firms will leave the industry. Since there are fewer firms, the supply curve for the item will shift to the left. (This will increase the price of the item.) Since the price increases, the number of units produced will increase. Eventually, the price will be the same as the average total cost and the marginal cost. The marginal cost will increase (since firms are producing more units). The average total cost will also increase.
On the left graph, the firm's quantity increases from $Q_{0}$ to $Q_{1}$. On the right graph, the quantity in the market decreases from $Q_{0}$ to $Q_{1}$.
