A monopoly is producing a level of output such that marginal revenue is equal to

Question

A monopoly is producing a level of output such that marginal revenue is equal to marginal cost. The firm is selling its output at a price of $5 per unit and is incurring average variable costs of $8 per unit and average total costs of $10 per unit. Given this information, it may be concluded that the firm:

a)is operating at maximum total profit

b)is operating at a loss that could be reduced by shutting down

c)is operating at a profit that could be increased by producing more output

d)is operating at a loss that is less than the loss incurred by shutting down

Explanation / Answer

b)is operating at a loss that could be reduced by shutting down

Explanation: Here, the price of $5 is not able to cover AVC of $8. So, the loss can be minimized by shutting down

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