Answer to Question #49396 in Microeconomics for susie

Question

Suppose a firm has monopoly power in the production of a particular good. If it finds that revenue and cost conditions are such that at all levels of output the price it can charge in order to sell all of the units is less than the average variable costs then it is in the firm’s best interest to:
close down because its operating losses will exceed its shut-down losses at all levels of output
maximize profits by producing where MR = MC
close down because its total operating cost will exceed its total revenue
minimize losses by producing where MR = MC

Answer 1

If a firm has monopoly power in the production of a particular good and it finds that revenue and cost conditions are such that at all levels of output the price it can charge in order to sell all of the units is less than the average variable costs then it is in the firm’s best interest to close down because its operating losses will exceed its shut-down losses at all levels of output. So, the right answer is a) close down because its operating losses will exceed its shut-down losses at all levels of output.