In Figure 17-4, below, initial demand, marginal cost, and marginal revenue curves (none of them shown) caused the firm to produce the profit-maximizing quantity Y 0 at a price of P0. Now the demand and marginal cost curves have moved to those shown, with the marginal revenue curve running through point L.
Figure 17-4
-If the firm in the figure above maintains its set price of P0, rather than dropping price to P1, it must be facing a "menu cost" of adjusting its price that exceeds
A) K - G.
B) K + G.
C) G - K.
D) J.
E) K.

Question

In Figure 17-4, below, initial demand, marginal cost, and marginal revenue curves (none of them shown) caused the firm to produce the profit-maximizing quantity Y 0 at a price of P0. Now the demand and marginal cost curves have moved to those shown, with the marginal revenue curve running through point L.
Figure 17-4 
-If the firm in the figure above maintains its set price of P0, rather than dropping price to P1, it must be facing a "menu cost" of adjusting its price that exceeds
A) K - G. 
B) K + G. 
C) G - K. 
D) J. 
E) K.

Quizplus · Accepted Answer

The firm will only maintain its price at P0 if the cost of changing the price (menu cost) is greater than the loss in revenue from not changing the price, which is represented by the area K - G.

In Figure 17-4, Below, Initial Demand, Marginal Cost, and Marginal