FIGURE 10-2

-The profit-maximizing firm illustrated Figure 10-2 operates in a monopolistically competitive industry. Which of the following statements best describes this firm?

Question

FIGURE 10-2
 
-The profit-maximizing firm illustrated Figure 10-2 operates in a monopolistically competitive industry. Which of the following statements best describes this firm?

Quizplus · Accepted Answer

The firm is operating where marginal revenue equals marginal cost (MR=MC) and charging a price greater than marginal cost, indicating some market power. At this point, the firm is producing at an output level where the demand curve is tangent to the average total cost curve, which means the firm is earning normal profit in the long run but experiencing economic loss in the short run. Therefore, the firm is operating at the profit-maximizing price and output but is making an economic loss. Option B and C are incorrect because the firm is already operating at the profit maximizing level, and changing the price or output further would result in a suboptimal outcome. Option D is incorrect because the firm is not experiencing losses greater than its fixed costs, and therefore, it should continue operating in the short run.

FIGURE 10-2 -The Profit-Maximizing Firm Illustrated Figure 10-2 Operates in a Monopolistically