Jimmy's java shop operates in a monopolistically competitive market.Jimmy's current output is where average costs are minimized.If this is the case, we would expect Jimmy to
A)increase output and lower price.
B)decrease output and Jimmy's average costs would increase.
C)continue production at the current level as Jimmy's is operating at his best outcome.
D)increase output and Jimmy's average costs would decrease.

Question

Quizplus · Accepted Answer

In monopolistic competition, firms do not produce at minimum average cost in the long run due to excess capacity. If Jimmy is currently minimizing average costs, he is likely producing more than the profit-maximizing quantity, so reducing output would increase average costs.

Jimmy's Java Shop Operates in a Monopolistically Competitive Market