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,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 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,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 correct choice is A) K - G. This is because the menu cost of adjusting the price must be greater than the net benefit (K - G) of maintaining the price at P₀ instead of reducing it to P₁. If the cost of changing the price (menu cost) is less than the net benefit of keeping the price the same, the firm would have an incentive to change the price. Therefore, for the firm to decide not to change the price, the menu cost must exceed the net benefit of maintaining the current price, which is represented by the difference K - G.

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