Ok. Let us learn step-by-step from the diagram mentioned at the bottom:
- You can see the price line. Our price is OP. It is assumed to be fixed in the case of perfect competition in the market.
- all three curves relating to cost, you can also see, are 'U' shaped, though with varying propensities.
- MC curves cuts that AVC curve from the lowest point of the latter.
- You must also not miss to see that as we go from left to right, the distance between ATC and AVC reduces (a little inconsistency in the hand-made diagram must be excused). This is so because the difference between ATC and AVC is equal to AFC; and AFC curve is always a rectangular hyperbola.
- Now let us come to the questions asked by you:
- a) a firm would begin to generate profits after achieving the production of OQ2 quantity. It is so because only after this point MR > MC.
- b) where a firm would operate but generate losses: Firm will operate but generate loss between Q1 and Q2, because between these two points, as you can see, MC > MR. When our cost will be more than revenue, definitely we will incur losses.
- c) where a firm would cease to produce. Firm will cease to produce after achieving the production level of OQ3. It is so because after this point, once again, MC > MR. Which means, if the firm goes beyond OQ3, it's cost for evey next unit produced will be higher than the revenue generated by it.
please see the attached file for the complet solution.
