Figure 94 Figure 9

question 61

Multiple Choice

Figure 9.4 Figure 9.4 shows short-run cost and demand curves for a monopolistically competitive firm in the market for designer watches.
-Refer to Figure 9.4.Should the firm represented in the diagram continue to stay in business despite its losses?

• A) No, it should shut down.
• B) Yes, its total revenue covers its variable cost.
• C) No, it is not able to cover its fixed cost.
• D) Yes, it should increase its revenue by raising its price.

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Definitions:

Lemons Problem

A term in economics used to describe the issue of quality uncertainty in a market where sellers have more information about the product quality than buyers, leading to adverse selection.

Adverse Selection

A situation where asymmetric information leads to the selection of undesirable risks by one party in a transaction, often seen in insurance and financial markets.

Moral Hazard

When a party whose actions are unobserved can affect the probability or magnitude of a payment associated with an event.

Asymmetric Information

Asymmetric information exists when one party in a transaction has more or better information than the other, potentially leading to an imbalance in power or unfair outcomes.