Table 13-3

Table 13-3 shows the demand and cost schedules for a monopolistically competitive firm.
-Refer to Table 13-3.What is the best course of action for the firm in the short run?
A)It should shut down.
B)It should stay in business because it covers some of its fixed cost.
C)It should increase its sales by lowering its price.
D)It should not cut its price but it should increase its sales by advertising.

Question

Table 13-3
  
Table 13-3 shows the demand and cost schedules for a monopolistically competitive firm.
-Refer to Table 13-3.What is the best course of action for the firm in the short run?
A)It should shut down. 
B)It should stay in business because it covers some of its fixed cost. 
C)It should increase its sales by lowering its price. 
D)It should not cut its price but it should increase its sales by advertising.

Quizplus · Accepted Answer

In the short run, the firm should continue to operate because it is covering some of its fixed costs. At the profit-maximizing quantity, the firm is earning a positive economic profit, even though it is not producing where marginal revenue equals marginal cost. Shutting down would result in a loss equal to the fixed cost, which is greater than the loss from producing in the short run. Lowering the price or increasing advertising would increase sales, but would also lower the profit per unit. Therefore, it would not be the best course of action for the firm in the short run.

Table 13-3 Table 13-3 Shows the Demand and Cost Schedules for a and Cost