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 Y₀ 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 Figure 17-4 above maintains its set price of P₀,rather than dropping price to P₁,this reduces its profit by
A)K - G.
B)K + G.
C)G - K.
D)G + H.
E)G.

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 Y₀ 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 Figure 17-4 above maintains its set price of P₀,rather than dropping price to P₁,this reduces its profit by
A)K - G. 
B)K + G. 
C)G - K. 
D)G + H. 
E)G.

Quizplus · Accepted Answer

The profit reduction comes from the lost opportunity to sell additional units at a higher price, represented by the area K, minus the cost savings from not having to sell the additional units at a lower price, represented by area G.

In Figure 17-4,below,initial Demand,marginal Cost,and Marginal Revenue Curves (None of Them