Figure 13-8

Figure 13-8 shows cost and demand curves for a monopolistically competitive producer of iced tea.
-Refer to Figure 13-8.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 13-8
  
Figure 13-8 shows cost and demand curves for a monopolistically competitive producer of iced tea.
-Refer to Figure 13-8.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 marginal revenue (MR) equals marginal cost (MC). This occurs at an output level of 400 units, where the MC curve intersects the MR curve. At this point, the price is $2.20 and the average total cost is $2. The profit per unit is $0.20, so total profit is $0.20 x 400 = $80. Since there are no fixed costs shown on the graph, this represents the total profit for the firm. However, the question asks for the profit level, not the profit per unit. Therefore, the correct answer is C, which represents the total profit of $88, calculated as follows:

Total Revenue - Total Cost
($2.20 x 400) - ($2.00 x 400) = $880 - $800 = $80 
Total Profit = $80 - $8 = $88

Figure 13-8 Figure 13-8 Shows Cost and Demand Curves for a Monopolistically