Refer to Figure 26.2 for a monopolistically competitive firm.At the profit-maximizing output and price, this firm is

Question

Quizplus · Accepted Answer

At the profit-maximizing output and price (Q2 and P2 in the graph), the firm is producing where marginal revenue (MR) equals marginal cost (MC), which is at point E. At this output level, the price (P2) is greater than the average total cost (ATC) at Q2. However, the price (P2) is less than the average revenue (AR) at Q2, indicating that the firm is facing a downward-sloping demand curve and has some market power. Since the ATC is greater than the price, the firm is earning a loss (the shaded area between ATC and P2). Therefore, the answer is B.