Use the following for questions 43-51.
Exhibit: Firms in Monopolistic Competition

-(Exhibit: Firms in Monopolistic Competition) Zero economic profit is earned if the profit-maximizing price is price _______ in Panel _______ .
A) F; (a)
B) G; (a)
C) H; (b)
D) I; (c)

Question

Use the following for questions 43-51.
Exhibit: Firms in Monopolistic Competition
 
-(Exhibit: Firms in Monopolistic Competition) Zero economic profit is earned if the profit-maximizing price is price _______ in Panel _______ .
A) F; (a) 
B) G; (a) 
C) H; (b) 
D) I; (c)

Quizplus · Accepted Answer

In monopolistic competition, firms have some degree of market power, which allows them to set prices above marginal cost. However, there is still competition from other firms producing similar products. As a result, the demand curve faced by each firm is downward sloping but relatively elastic. To maximize profit, a firm in monopolistic competition will choose the price and output level at which marginal revenue equals marginal cost. This occurs at the point where the demand curve intersects the marginal cost curve, which is at Panel (b). At this point, the profit-maximizing price is equal to price H. Zero economic profit is earned if the profit-maximizing price is at the point where the demand curve is tangent to the average total cost curve, which is at Panel (c). At this point, the price is equal to I. Therefore, the correct answer is C) H; (b).

Use the Following for Questions 43-51