The table below shows the payoff (profit) matrix of Firm A and Firm B indicating the profit outcome that corresponds to each firm's pricing strategy (where $500 and $200 are the pricing strategies of two firms).Table 12.2

-Suppose a monopolistically competitive firm is producing at the profit-maximizing output level and is receiving a price that is sufficient to cover only its average variable cost. If the price falls further the firm should suspend its operations.

Question

The table below shows the payoff (profit) matrix of Firm A and Firm B indicating the profit outcome that corresponds to each firm's pricing strategy (where $500 and $200 are the pricing strategies of two firms).Table 12.2
 
-Suppose a monopolistically competitive firm is producing at the profit-maximizing output level and is receiving a price that is sufficient to cover only its average variable cost. If the price falls further the firm should suspend its operations.

Quizplus · Accepted Answer

If the price falls below the average variable cost, the firm would not be able to cover its variable costs, leading to losses greater than its fixed costs, making it rational to suspend operations.

The Table Below Shows the Payoff (Profit) Matrix of Firm