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 would be to produce the quantity where marginal cost equals marginal revenue, which is Q_y units, and charge a price of P₁. At this point, the firm is able to minimise its losses and continue operating in the short run. Option A is incorrect because if the firm were to exit the industry, it would still incur a loss equal to its fixed costs. Option B is incorrect because producing at quantity QS1U0B1yS1U0B1 would incur even greater losses. Option C is incorrect because producing at quantity QS1U0B2yS1U0B2 would also incur greater losses.

Figure 9-7 Figure 9-7 Shows Short-Run Cost and Demand