The Specialty Cake Store, a Monopolistically Competitive Firm, Is Producing

The Specialty Cake Store, a monopolistically competitive firm, is producing 200 decorated cakes per day and selling each cake for $12. At that production level ATC is $20, AVC is $15, AFC is $5, and both MR and MC are $8. This firm should

A) continue to produce 200 cakes, as price is greater than AFC.
B) increase output to the point where price equals marginal cost.
C) decrease output to the point where marginal cost equals average cost.
D) produce zero cakes and just pay fixed costs.

Correct Answer:

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