A monopolistically competitive firm is producing at a short-run output level where average total cost is $10.00, marginal cost is $5.00, marginal revenue is $6.00, and price is $12.00. In the short run, the firm should
A) decrease the level of output.
B) increase the level of output.
C) make no change in the level of output.
D) increase product price.

Question

Quizplus · Accepted Answer

In the short run, the firm should increase the level of output because:
- MR > MC: The marginal revenue ($6.00) received from selling an additional unit of output is greater than the marginal cost ($5.00) of producing it. By increasing output, the firm can earn additional profit.
- P > ATC: The price ($12.00) is greater than the average total cost ($10.00), so each unit sold contributes positively to the firm's profit. 
Therefore, the firm should increase production to increase profit in the short run.

A Monopolistically Competitive Firm Is Producing at a Short-Run Output