Exhibit 10-1 A monopolistic competitive firm
-As represented in Exhibit 10-1, the maximum long-run economic profit earned by this monopolistic competitive firm is:
A) zero.
B) $200 per day.
C) $1,000 per day.
D) $20,000 per day.

Question

Exhibit 10-1 A monopolistic competitive firm 
-As represented in Exhibit 10-1, the maximum long-run economic profit earned by this monopolistic competitive firm is:
A) zero. 
B) $200 per day. 
C) $1,000 per day. 
D) $20,000 per day.

Quizplus · Accepted Answer

In the long run, in a monopolistic competition market structure, firms will earn zero economic profit due to the presence of easy entry and exit of firms. As a result, the demand curve facing the firm will shift downwards until it becomes tangent to the average total cost curve at its minimum point. At this point, output is produced at the minimum point of the average total cost curve, and the firm earns zero economic profit. In the graph, this occurs at the output level of 10 units, where price is $20 and average total cost is $20, resulting in zero economic profit. Therefore, the maximum long-run economic profit earned by this monopolistic competitive firm is zero.

Exhibit 10-1 a Monopolistic Competitive Firm