When a monopolistically competitive firm is making zero economic profits,it is producing so that the average total cost curve is tangent to the demand curve.At this output:
A)the firm is maximizing profits,and marginal cost must equal marginal revenue.
B)the firm is not maximizing profits,and a slight increase or decrease in output will lead to positive profits.
C)since economic profits are zero,the condition that marginal revenue equals marginal cost is irrelevant.
D)the condition that marginal revenue equals marginal cost continues to be relevant,but the marginal revenue and marginal cost curves need not intersect directly below the point of tangency between the average total cost curve and the demand curve.

Question

Quizplus · Accepted Answer

When a monopolistically competitive firm is making zero economic profits and its average total cost curve is tangent to the demand curve at its output level, it is indeed maximizing profits. This is because, at this point, the firm's price equals its average total cost, meaning it covers all its costs, including the opportunity costs. The condition for profit maximization, where marginal cost (MC) equals marginal revenue (MR), still holds. This is because the firm cannot increase its profits by altering its output level; any deviation would lead to either unmet demand (at higher prices) or unsold inventory (at lower prices), both of which reduce profitability.

When a Monopolistically Competitive Firm Is Making Zero Economic Profits,it