Final answer:
Book breakeven, or accounting breakeven, is the level of output at which a firm's total revenue matches its total costs, resulting in zero profits. It is achieved when the price is equal to average cost, helping firms make critical decisions about entering or exiting the market based on industry profits or losses.
Step-by-step explanation:
Book breakeven, also known as accounting breakeven, refers to the break even point where a firm's revenue is exactly equal to its total costs, and therefore, no profit or loss is incurred. This point is critical in understanding a firm's operations as it indicates the level of output where the marginal cost curve intersects the average cost (AC) curve at its minimum. At this point, if the market price is equal to this breakeven point, the firm earns zero economic profits. This concept is essential for long-run decision-making, where firms may decide to enter or exit an industry.
Figure 8.6 demonstrates that if a firm's operating price is below the break even point, it must decide whether to continue operating at a loss or to shut down. The preferable option is the one that minimizes losses. This decision is related to covering its average variable cost, where operating at a price greater than average variable cost but less than average cost would entail operating at a loss, yet still preferable to a shutdown if it results in lower losses.
According to Figure 8.7, in the long run, firms reach a long-run equilibrium where they earn zero economic profits, which occurs at an output level where price (P) equals marginal revenue (MR), marginal cost (MC), and average cost (AC).