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Homework answers / question archive / The table shows the firm's demand and cost schedules with the firm in monopolistic competition
The table shows the firm's demand and cost schedules with the firm in monopolistic competition. What is the best course of action for the firm in the short run?
A. It should shut down.
B. It should increase its sales by lowering its price.
C. It should stay in business because it covers some of its fixed costs.
D. It should not cut its price but it should increase its sales by advertising.
| Quantity | Price (Dollars) | Total Revenue (Dollars) | Total Variable Costs (Dollars) | Total Cost (Dollars) |
|---|---|---|---|---|
| 0 | 22 | 0 | 0 | 50 |
| 1 | 20 | 20 | 16 | 66 |
| 2 | 19 | 38 | 31 | 81 |
| 3 | 18 | 54 | 45 | 95 |
| 4 | 17 | 68 | 59 | 109 |
| 5 | 16 | 80 | 75 | 125 |
| 6 | 15 | 90 | 93 | 143 |
| 7 | 14 | 98 | 112 | 162 |
| 8 | 13 | 104 | 140 | 190 |
| 9 | 12 | 108 | 180 | 230 |
| 10 | 11 | 110 | 230 | 280 |
Answer: C
A firm will continue to operate in the short-run if revenue is greater than total variable cost. This is because the firm must still pay fixed costs in the short-run but if it continues to operate with revenue higher than total variable cost, it can pay off some of its fixed costs. In this case, any production level between 1 and 4 will do but output level 3 will maximize profits.
