A picture frame company operates in a monopolistically competitive market. Its short-run equilibrium price is $80 and its ATC is $65. It sells 100 picture frames a week. From this we can tell:
A) this firm is making a normal profit.
B) other picture-frame companies will want to exit the market.
C) there are no other picture-frame companies in the area.
D) economic profits are $1500.
E) total profits are being maximised.

Question

Quizplus · Accepted Answer

EIn a monopolistically competitive market, a firm is making an economic profit if its price is above its average total cost (ATC). Here, the price ($80) is above the ATC ($65), and the firm sells 100 picture frames a week. The economic profit per frame is the difference between the price and the ATC, which is $15 ($80 - $65). For 100 frames, the total economic profit is $15 * 100 = $1500, which corresponds to choice D. Additionally, in the short run, firms in monopolistic competition will adjust their output to maximize profits, implying that total profits are being maximized at this output level, as indicated in choice E.

A Picture Frame Company Operates in a Monopolistically Competitive Market