Suppose a monopolist charges a price corresponding to the intersection of the marginal cost and marginal revenue curves. If this price is between its average variable cost and average total cost curves, the firm will:
A) earn an economic profit.
B) stay in operation in the short-run, but shut down in the long run if demand remains the same.
C) shut down.
D) none of the above.

Question

Quizplus · Accepted Answer

In the short run, the firm will continue to operate if the price covers the average variable cost, even if it does not cover the average total cost, to minimize losses. However, in the long run, if the price does not cover the average total cost, the firm will shut down.

Suppose a Monopolist Charges a Price Corresponding to the Intersection