Use the following for questions 40-42.
Exhibit: Profit Maximization for a Firm in Monopolistic Competition

-(Exhibit: Profit Maximization for a Firm in Monopolistic Competition) Suppose that an innovation reduces a firm's fixed costs and reduces cost from ATC to ATC´.Suppose further that after the innovation reduced the cost to ATC´, it costs a total of $18 per unit to produce 170 units per day.If the firm charges a price equal to marginal cost, total net profit will be:
A) $1,190.
B) $1,700.
C) $3,060.
D) $3,400.

Question

Use the following for questions 40-42.
Exhibit: Profit Maximization for a Firm in Monopolistic Competition
 
-(Exhibit: Profit Maximization for a Firm in Monopolistic Competition) Suppose that an innovation reduces a firm's fixed costs and reduces cost from ATC to ATC´.Suppose further that after the innovation reduced the cost to ATC´, it costs a total of $18 per unit to produce 170 units per day.If the firm charges a price equal to marginal cost, total net profit will be:
A) $1,190. 
B) $1,700. 
C) $3,060. 
D) $3,400.

Quizplus · Accepted Answer

To maximize profit, the firm should produce where marginal cost (MC) equals marginal revenue (MR). Since the firm is charging a price equal to marginal cost, we know that price equals $18 as well.

To find the quantity where MC equals MR, we need to look at the exhibit provided. ATC´ intersects with the marginal cost curve at a quantity of approximately 170 units per day.

Thus, the firm should produce and sell 170 units per day at a price of $18 per unit.

Total revenue will be:

TR = price x quantity = $18 x 170 = $3,060

Total cost will be:

TC = ATC´ x quantity = $9 x 170 = $1,530

Total net profit will be:

π = TR - TC = $3,060 - $1,530 = $1,530

Therefore, the best choice is A, with a total net profit of $1,530.

Use the Following for Questions 40-42