Assume that a monopolistically competitive firm faces the following situation: P = $20; output = 13,000 units, MC = $16, ATC = $28, AVC = $22, and MR = $16. Which statement BEST describes the firm's situation?
A) The firm is minimizing its losses.
B) The firm would minimize its losses by shutting down in the short run.
C) The firm would minimize its losses by increasing its output.
D) The firm would maximize its profit by decreasing its output.

Question

Quizplus · Accepted Answer

The firm should shut down in the short run because the price ($20) is less than the average variable cost ($22), meaning it cannot cover its variable costs.

Assume That a Monopolistically Competitive Firm Faces the Following Situation