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But since c(0 is concave, average cost exceeds marginal cost: c(q*)/ç* > «

c'iq ). Therefore, the firm's profits at the first-best price are negative:

(See Figure 22.F.6(a) for an illustration. The average cost (AC) at a point on

the cost curve is the slope of the line connecting the point with the origin. The marginal cost (MC) at this point is the slope of the tangent to the curve at this point. The average cost always exceeds the marginal cost for a convex cost curve.)

On the other hand, If costs are covered and p° « c(q°)/q°, then we must have S'(q°) = p° > c'(g°), which implies that production is socially suboptimal. (See Figure 22.F.6(b)).

Figure 22. F. 6(b)

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