Final answer:
The average cost curve indicates a firm's profitability based on its position relative to the average revenue curve. A firm makes profits when the average cost curve is below the average revenue curve and incurs losses when it is above.
Step-by-step explanation:
The average cost curve can illustrate whether a firm is making profits or losses based on its position relative to the average revenue curve and the marginal cost curve. When the average cost curve is below the average revenue curve at a given level of output, it indicates that the firm is making profits because the price (which equals average revenue in perfect competition) is greater than the average cost, resulting in a positive profit margin. Conversely, if the price is below the average cost, the firm incurs losses since the cost of production is higher than the revenues earned.
Moreover, factor (b) from the question points to the condition where the firm makes losses, which is true when the average cost curve is always above the average revenue curve. This is consistent with economic principles as the firm's total revenue would be less than its total costs at every quantity level, causing it to suffer losses.