The Specialty Cake Store, a monopolistically competitive firm, is producing 200 decorated cakes per day and selling each cake for $12. At that production level ATC is $20, AVC is $15, AFC is $5, and both MR and MC are $8. This firm should

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The firm should produce zero cakes and just pay fixed costs because the price ($12) is less than the average total cost ($20), resulting in a loss on each cake sold. Since MR ($8) is also less than ATC, the firm is not covering its total costs and should cease production to minimize losses.

The Specialty Cake Store, a Monopolistically Competitive Firm, Is Producing