Table 10.3 Table 10.3 shows the demand and cost schedules for a monopolistically competitive firm.
-Refer to Table 10.3.What is the best course of action for the firm in the short run?
A)It should shut down.
B)It should stay in business because it covers some of its fixed cost.
C)It should increase its sales by lowering its price.
D)It should not cut its price, but it should increase its sales by advertising.

Question

Table 10.3  Table 10.3 shows the demand and cost schedules for a monopolistically competitive firm.
-Refer to Table 10.3.What is the best course of action for the firm in the short run?
A)It should shut down. 
B)It should stay in business because it covers some of its fixed cost. 
C)It should increase its sales by lowering its price. 
D)It should not cut its price, but it should increase its sales by advertising.

Quizplus · Accepted Answer

In the short run, the firm should stay in business because it is covering some of its fixed cost. The firm's total revenue is greater than variable cost, meaning that it is still generating a profit, albeit not a large one. It would not be optimal to shut down as the fixed cost has already been incurred and it would not be able to recover any of those costs. Lowering the price may increase sales but also reduce profit margins further, and advertising may increase variable costs without guaranteeing an increase in sales. Therefore, staying in business and maintaining its current price and output levels is the best course of action for the firm in the short run.

Table 103 Table 10