Figure 13-7

Figure 13-7 shows short-run cost and demand curves for a monopolistically competitive firm in the footwear market.
-Refer to Figure 13-7.Which of the following statements describes the best course of action for the firm depicted in the diagram?
A)The firm should exit the industry because its price is less than its average total cost.
B)The firm should minimize its losses by producing Qᵧ units and charging a price of P₀.
C)The firm should minimize its losses by producing Qᵧ units and charging a price of P₂.
D)The firm should minimize its losses by producing Qᵧ units and charging a price of P₁.

Question

Figure 13-7
  
Figure 13-7 shows short-run cost and demand curves for a monopolistically competitive firm in the footwear market.
-Refer to Figure 13-7.Which of the following statements describes the best course of action for the firm depicted in the diagram?
A)The firm should exit the industry because its price is less than its average total cost. 
B)The firm should minimize its losses by producing Qᵧ units and charging a price of P₀. 
C)The firm should minimize its losses by producing Qᵧ units and charging a price of P₂. 
D)The firm should minimize its losses by producing Qᵧ units and charging a price of P₁.

Quizplus · Accepted Answer

The best course of action for the firm in the diagram is to minimize its losses. This occurs at the level of output where marginal revenue equals marginal cost, which is Qᵧ in the diagram. The corresponding price at this level of output is P₁, which is higher than the price at Q* but lower than the price at Qₓ. Therefore, the firm should produce Qᵧ units and charge a price of P₁ in order to minimize its losses. Option A is incorrect because exiting the industry is not the best course of action if the firm can minimize its losses by producing at some level of output. Option B is incorrect because the price of P₀ is too low and would result in greater losses than producing at Qᵧ and charging a higher price. Option C is incorrect because the price of P₂ is too high and would result in lower quantities sold and more losses than producing at Qᵧ and charging a slightly lower price.

Figure 13-7 Figure 13-7 Shows Short-Run Cost and Demand Curves for a and Demand