Figure 10.4 Figure 10.4 shows short-run cost and demand curves for a monopolistically competitive firm in the market for designer watches.
-Refer to Figure 10.4.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 10.4  Figure 10.4 shows short-run cost and demand curves for a monopolistically competitive firm in the market for designer watches.
-Refer to Figure 10.4.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

In the short run, a firm should continue to operate as long as its total revenue covers its variable costs, even if it cannot cover its total costs (including fixed costs). This is because, in the short run, fixed costs are sunk costs and should not affect the decision to continue operations. The firm can cover its variable costs and contribute to fixed costs, minimizing losses compared to shutting down immediately.

Figure 104 Figure 10