Figure 9.7 Figure 9.7 shows short-run cost and demand curves for a monopolistically competitive firm in the footwear market.
-Refer to Figure 9.7.Which of the following statements describes the best course of action for the firm depicted in the diagram?

Question

Figure 9.7  Figure 9.7 shows short-run cost and demand curves for a monopolistically competitive firm in the footwear market.
-Refer to Figure 9.7.Which of the following statements describes the best course of action for the firm depicted in the diagram?

Quizplus · Accepted Answer

The best course of action for the firm depicted in the diagram is to minimize its losses by producing Q_y units and charging a price of P₁. At this output level, the marginal revenue (MR) equals marginal cost (MC), which is the profit-maximizing level of output. However, the price charged is less than the average total cost (ATC) at this output level, which means that the firm is still incurring losses. But producing any lower quantity than Q1 would result in even higher losses. Therefore, the best strategy for the firm is to minimize its losses by producing at the output level where MR=MC, which is Q1, and charging a price equal to the point on the demand curve at that output level, which is P1.

Figure 97 Figure 9