A monopoly firm is producing where its marginal revenue is equal to marginal cost. At this level of output, the firm's price is $3.75 and its average total cost is $4.50 . Is the firm earning a profit? Explain
How could this firm determine whether it should continue to operate in the short run or if it should shut down?
The firm is incurring an economic loss. Its price ($3.75) is less than its average total cost ($4.50). In order to determine if the firm should continue operating in the short run, we must compare the firm's price with its average variable cost. As long as the price is greater than average variable cost, the firm should continue to operate.
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