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 of 70 units and the corresponding price of $16, the average revenue (AR) is less than the average total cost (ATC), indicating that the firm is making an economic loss (AR<ATC). This is a characteristic of monopolistic competition, where firms have some market power but also face competition from close substitutes, leading to a situation where economic profits are eroded in the long run.