Figure 10.7 Figure 10.7 shows short-run cost and demand curves for a monopolistically competitive firm in the footwear market. -Refer to Figure 10.7.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 minimise its losses by producing Q_yunits and charging a price of P₀. C)The firm should minimise its losses by producing Q_yunits and charging a price of P₂. D)The firm should minimise its losses by producing Q_y units and charging a price of P₁.

Question

Quizplus · Accepted Answer

The best course of action for the firm depicted in the diagram is to produce the quantity where marginal revenue (MR) equals marginal cost (MC), which is Q_y units. This will minimize the losses of the firm. At this output level, the firm should charge a price equal to the demand curve at that quantity, which is P₁. This price is above the average variable cost, so the firm is covering its variable costs, but it is below the average total cost, so the firm is incurring losses in the short run. However, producing and selling at this output level is better than shutting down immediately because shutting down would result in a total loss equal to the fixed costs.

Figure 107 Figure 10