Figure 13-4

Figure 13-4 shows short-run cost and demand curves for a monopolistically competitive firm in the market for designer watches.
-Refer to Figure 13-4.Should the firm represented in the diagram continue to stay in business despite its losses?
A)No, it should shut down.
B)Yes, its total revenue covers its variable cost.
C)No, it is not able to cover its fixed cost.
D)Yes, it should increase its revenue by raising its price.

Question

Figure 13-4
  
Figure 13-4 shows short-run cost and demand curves for a monopolistically competitive firm in the market for designer watches.
-Refer to Figure 13-4.Should the firm represented in the diagram continue to stay in business despite its losses?
A)No, it should shut down. 
B)Yes, its total revenue covers its variable cost. 
C)No, it is not able to cover its fixed cost. 
D)Yes, it should increase its revenue by raising its price.

Quizplus · Accepted Answer

The firm should continue to stay in business despite its losses because its total revenue covers its variable cost. Even though it is not able to cover its fixed cost, it is better to continue operating in the short-run and cover some of the fixed cost rather than shutting down completely and incurring the entire fixed cost as a loss. Additionally, increasing its price may not necessarily lead to an increase in revenue as the demand for designer watches may be elastic.

Figure 13-4 Figure 13-4 Shows Short-Run Cost and Demand Curves for a and Demand