If an imperfectly competitive firm is producing a level of output where marginal cost is equal to marginal revenue, marginal revenue is below average variable cost, and price is equal to average total cost, then the firm
A)should shut down
B)should decrease output, but should not shut down
C)should increase output
D)None of the above is correct

Question

Quizplus · Accepted Answer

In this scenario, the firm is covering its average total costs (since price equals average total cost), which means it is covering both its average variable and average fixed costs. Therefore, it does not need to shut down immediately. The condition where marginal cost equals marginal revenue indicates the firm is maximizing profit (or minimizing losses) at that level of output. The fact that marginal revenue is below average variable cost does not align with the given conditions, as it contradicts the premise that price equals average total cost and the firm is covering its costs.

If an Imperfectly Competitive Firm Is Producing a Level of Output