The graph depicts a monopolistically competitive firm. At the profit-maximizing level of short-run output, this monopolistically competitive firm will be making a profit of
A) $275.
B) $350.
C) $500.
D) $525.

Question

The graph depicts a monopolistically competitive firm.  At the profit-maximizing level of short-run output, this monopolistically competitive firm will be making a profit of
A) $275. 
B) $350. 
C) $500. 
D) $525.

Quizplus · Accepted Answer

At the profit-maximizing level of output, a firm in monopolistic competition produces where marginal revenue (MR) equals marginal cost (MC) and sets a price that exceeds its average variable cost (AVC). From the graph, we can see that the profit-maximizing output level is where MR intersects MC at Q = 8. At this output level, the price is $75 and the average cost is $50. Therefore, the profit per unit is $25. The total profit earned by the firm is the profit per unit multiplied by the quantity produced, which is 25 × 8 = $200. Adding the fixed cost of $325, the total profit is $525. Therefore, the answer is D.

The Graph Depicts a Monopolistically Competitive Firm