Question

If the price was slightly less than average total cost, but still greater than average variable cost, then the profit-maximizing, monopolistically competitive firm would

Answer choices:

produce an output amount that corresponded to the place where marginal cost equals marginal revenue and break even.

produce an output amount where marginal cost equals marginal revenue and make a small profit.

continue to produce an output amount that corresponded to the place where marginal cost equals marginal revenue, but make a small loss.

produce an output amount that corresponded to the place where average total cost equals average variable cost and incur a small loss.

shut down to minimize losses in the short run.

Answer 1

Ans: continue to produce an output amount that corresponded to the place where marginal cost equals marginal revenue, but make a small loss.

Explanation:

Under monopolistic market structure , the profit maximization condition is where marginal revenue equals marginal cost ( MR = MC). In the above scenario, price is less than the average total cost and greater than the average variable cost. It means the firm is incurring a loss because price is less than the average total cost ( P < ATC) but will continue the production process as the price is above the variable cost ( P > AVC). Shutdown point occurs where price  is equal to average variable cost ( P = AVC).