Suppose a monopolist's demand curve lies below its average variable cost curve. The firm will:
A) stay in operation in the short-run.
B) earn an economic profit.
C) earn an economic profit in the long run.
D) shut down.

Question

Quizplus · Accepted Answer

If the demand curve lies below the average variable cost curve, the firm is not earning enough revenue to cover its variable costs. In this case, the firm should shut down in the short-run to minimize its losses. If the situation persists in the long-run, the firm may need to exit the market altogether. Therefore, the best choice is D.

Suppose a Monopolist's Demand Curve Lies Below Its Average Variable