Figure 16-2. The figure is drawn for a monopolistically competitive firm.

-Refer to Figure 16-2. Suppose that average total cost is $36 when Q=24. What is the profit-maximizing price and resulting profit?
A)P=$24, profit=$0
B)P=$36, profit=$144
C)P=$36, profit=$48
D)P=$36, profit=$0

Question

Figure 16-2. The figure is drawn for a monopolistically competitive firm.

-Refer to Figure 16-2. Suppose that average total cost is $36 when Q=24. What is the profit-maximizing price and resulting profit?
A)P=$24, profit=$0 
B)P=$36, profit=$144 
C)P=$36, profit=$48 
D)P=$36, profit=$0

Quizplus · Accepted Answer

In monopolistic competition, the profit-maximizing output occurs where marginal revenue equals marginal cost (MR=MC). At this level of output, the firm charges a price equal to the point on the demand curve that corresponds to the quantity produced (in this case, $36). Since the average total cost is also $36 at this level of output, the firm is only breaking even and earning zero economic profit. Therefore, the profit-maximizing price is $36 and the resulting profit is zero (Option D).