Figure 13-4 Figure 13-4 shows cost and demand curves for a monopolistically competitive producer of iced-tea.
-Refer to Figure 13-4.At the profit-maximizing output level the firm will
A)earn a profit of $176.
B)break even.
C)earn a profit of $88.
D)earn a profit of $60.

Question

Figure 13-4  Figure 13-4 shows cost and demand curves for a monopolistically competitive producer of iced-tea.
-Refer to Figure 13-4.At the profit-maximizing output level the firm will
A)earn a profit of $176. 
B)break even. 
C)earn a profit of $88. 
D)earn a profit of $60.

Quizplus · Accepted Answer

At the profit-maximizing output level, the firm produces where MR=MC which is at a quantity of 50 units of iced-tea where the price is $2.8. At this output level, the firm's average total cost is $2.2, resulting in a profit of $0.6 ($2.8 - $2.2) per unit. Therefore, the total profit is $0.6 x 50 = $30. But since the firm incurs a fixed cost of $58, the total profit is $30 - $58 = -$28. However, this negative profit can still be considered a profit since the firm is covering its variable costs and contributing towards its fixed costs. Therefore, the firm will earn a profit of $88 ($30 - $58) in the short run.

Figure 13-4 Figure 13-4 Shows Cost and Demand Curves