Suppose both a monopolist and a perfectly competitive firm charge a price corresponding to the quantity at the intersection of the marginal cost and marginal revenue curves. If this price is between each firm's average variable cost and average total cost curves,
A) the perfectly competitive firm will continue to operate in the short run but the monopolist will shut down.
B) both firms will continue to operate in the short run.
C) both firms will shut down in the short run.
D) the perfectly competitive firm will continue to operate in spite of the loss but the monopolist will earn a profit.

Question

Quizplus · Accepted Answer

If the price is between each firm's average variable cost and average total cost curves, both firms can cover their variable costs and some portion of fixed costs. In this case, both a perfectly competitive firm and a monopolist can continue to operate in the short run. However, only the perfectly competitive firm will operate at a zero economic profit while the monopolist will earn a positive economic profit since it has market power.

Suppose Both a Monopolist and a Perfectly Competitive Firm Charge