Final answer:
A monopolistically competitive firm will shut down temporarily if the price is less than AVC to minimize losses. The profit-maximization condition for such firms is to set MR equal to MC, with the price charged being higher than MR due to the downward-sloping demand curve, which leads to allocative inefficiency and less output produced compared to a perfectly competitive industry. The correct answer is option c).
Step-by-step explanation:
In the short-run, a monopolistically competitive firm will shut down temporarily if the price is less than average variable costs (AVC). If price falls below AVC, the firm will not be able to earn enough revenues to cover its variable costs, leading to a smaller loss by shutting down and producing no output, rather than staying in operation and losing all of its fixed costs plus some variable costs. In contrast, in perfect price discrimination, the monopolist would produce more output and earn maximum possible profits as each buyer is paying exactly what they think the product is worth, leaving no consumer surplus.
However, in a monopolistically competitive market, the rule for maximizing profit is to set marginal revenue (MR) equal to marginal cost (MC), and the firm will charge a price that is higher than MR because the demand curve is downward sloping, leading to allocative inefficiency and a lower quantity of goods produced compared to a perfectly competitive industry.