Figure 13-7 shows short-run cost and demand curves for a monopolistically competitive firm in the footwear market.
-Refer to Figure 13-7.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 minimize its losses by producing Qy units and charging a price of P0.
C)The firm should minimize its losses by producing Qy units and charging a price of P2.
D)The firm should minimize its losses by producing Qy units and charging a price of P1.

Question

Figure 13-7 shows short-run cost and demand curves for a monopolistically competitive firm in the footwear market.
-Refer to Figure 13-7.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 minimize its losses by producing Qy units and charging a price of P0. 
C)The firm should minimize its losses by producing Qy units and charging a price of P2. 
D)The firm should minimize its losses by producing Qy units and charging a price of P1.

Quizplus · Accepted Answer

The best course of action for the firm depicted in the diagram is to minimize its losses by producing Qy units and charging a price of P1. At this output level, the firm's average total cost (ATC) is equal to its price. This means that the firm is covering all of its costs, but is not making a profit. Producing a lower output (Q1) would lead to even higher losses, as the firm would not be covering its fixed costs. Producing a higher output (Q2) would lead to higher total revenue, but also higher total costs, resulting in the firm still facing losses. Therefore, the best option for the firm is to produce Qy units and charge a price of P1.

Figure 13-7 Shows Short-Run Cost and Demand Curves for a Monopolistically