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

-Refer to Figure 16-2. If the average variable cost is $24 at the profit-maximizing quantity, and if the firm's fixed costs amount to $60, then the firm's maximum profit is
A)$-60.
B)$196.
C)$228.
D)$288.

Question

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

-Refer to Figure 16-2. If the average variable cost is $24 at the profit-maximizing quantity, and if the firm's fixed costs amount to $60, then the firm's maximum profit is
A)$-60. 
B)$196. 
C)$228. 
D)$288.

Quizplus · Accepted Answer

The profit-maximizing quantity for a monopolistically competitive firm occurs where marginal revenue equals marginal cost. In this case, that quantity is 8 units of output. At this quantity, the price is $30 per unit, and the total cost is $192 (8 units at an average variable cost of $24 plus fixed costs of $60). Total revenue is $240 (8 units at a price of $30). Therefore, the maximum profit is $240 - $192 = $48.