Suppose a monopolist charges a price corresponding to the intersection of the marginal cost and marginal revenue curves. If the price is between its average variable cost and average total cost curves, the firm will:
A) earn an economic profit.
B) stay in operation in the short run, but shut down in the long run if demand remains the same.
C) shut down.
D) charge a higher price.

Question

Quizplus · Accepted Answer

If the price is above the average variable cost, the firm will at least be covering its variable costs and be able to operate in the short run. However, if the price is below average total cost, the firm will be operating at a loss in the long run and will eventually shut down. Here, the price is between the average variable cost and average total cost, so the firm can cover its variable costs and stay in operation in the short run, but will shut down in the long run if demand remains the same. Therefore, the best choice is B.

Suppose a Monopolist Charges a Price Corresponding to the Intersection