A monopolistic competitor shuts down production in the short run if ________.

Question

Quizplus · Accepted Answer

In the short run, a monopolistic competitor will shut down production if total revenues do not cover variable costs. This is because fixed costs cannot be avoided in the short run, so the only costs that can be saved by shutting down are the variable costs. If total revenues do not cover these costs, the firm will be better off shutting down rather than continuing to produce at a loss. Marginal revenue and marginal cost, as well as average cost, may be important considerations in the long run, but they are not the main factor that determines whether or not a monopolistic competitor will shut down in the short run.

A Monopolistic Competitor Shuts Down Production in the Short Run