At a price of $8, the marginal revenue of a monopolistically competitive firm is

Question

At a price of $8, the marginal revenue of a monopolistically competitive firm is $5. If the marginal cost is $7 and average total cost is $4, what should the firm do to maximize profits?

The firm should increase output and decrease price.

The firm should increase both output and price.

The first should reduce output and increase price.

The firm reduce both output and price.

In this game table, the Nash equilibrium is:
Fancy, Fancy = (3, 6) Casual, Fancy = (4, 8) Casual, Casual = (9, 7) Fancy, Casual = (7, 2)

Explanation / Answer

Q1
Answer
Casual, Fancy = (4, 8)
the Mario have the dominant strategy of Casual and Isabells's have the dominant strategy of Fancy so the Nash equilibrium is Casual, Fancy

the dominant strategy is a strategy played by a player do not change in any condition,
Isabella chooses fancy or casual Mario will choose Casual and Mario choose any Fancy or Casual Isabells chooses Fancy only.
because the payoff is high on these strategies.

Q2
Answer
The first should reduce output and increase price
The firm maximizes profit at MR=MC but here the MC>MR so the firm should reduce output and increase the price so the MR=increase and MC will decrease.

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