If the price is P1, the firms are

• A. Earning an economic profit and some firms will exit
• B. Suffering an economic loss and some firms will exit
• C. Earning an economic profit and some firms will enter
• D. Suffering an economic loss and some firms will enter

Answer: (B)

Verified step by step guidance

1. Identify the key curves on the graph: the Marginal Cost (MC) curve and the Average Total Cost (ATC) curve.
2. Observe the position of the price line P1 in relation to the ATC curve. If P1 is below the ATC curve, firms are suffering an economic loss.
3. Understand that when firms are suffering an economic loss, they are not covering their total costs, which includes both fixed and variable costs.
4. Recognize that in the long run, if firms are suffering losses, some firms will exit the market to avoid further losses.
5. Conclude that the correct scenario is that firms are suffering an economic loss and some firms will exit the market.