The question asks how many caps the firm will produce if the market
price is P1? From the graph we see that, at price P1 P = MC when the firm is producing Q1 units of output; so this seems, at first, like the correct answer.
However, we know that even in the short run a firm will produce
no output when P < AVC as is the case here. Thus, the firm will produce zero (0) caps.
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