Refer to Figure 26.2 for a monopolistically competitive firm. At the profit-maximizing output and price, this firm is
A) Earning an economic profit.
B) Earning an economic loss.
C) Breaking even.
D) Earning a monopoly profit.

Question

Refer to Figure 26.2 for a monopolistically competitive firm. At the profit-maximizing output and price, this firm is
A) Earning an economic profit. 
B) Earning an economic loss. 
C) Breaking even. 
D) Earning a monopoly profit.

Quizplus · Accepted Answer

At the profit-maximizing output and price, the firm's average total cost (ATC) is higher than the demand (AR) curve. This means that the firm is earning a price that exceeds its cost, but not enough to cover all of its costs. Therefore, it is earning an economic loss.