Question 1
Pie-Oh-My, a monopolistically competitive firm, is baking 80 gourmet pies per day and selling each pie for $25. At that production level
ATC is $40,
AVC is $30,
AFC is $10, and both
MR and
MC are $16. This firm should
◦ continue to produce 80 pies, as price is greater than
AFC.
◦ increase output to the point where price equals marginal cost.
◦ decrease output to the point where marginal cost equals average cost.
◦ produce zero pies and pay fixed costs.
Question 2
Pie-Oh-My, a monopolistically competitive firm, is producing 80 gourmet pies per day and selling each pie for $32. At that production level
ATC is $40,
AVC is $30,
AFC is $10, and both
MR and
MC are $16. In the short run, this firm should
◦ continue to produce 80 pies, as price is greater than
AVC.
◦ increase output to the point where price equals marginal cost.
◦ decrease output to the point where price equals average total cost.
◦ shutdown and produce zero pies and pay fixed costs.
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