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

-Refer to Figure 16-2. Suppose ATC = $36 when Q = 24. Then the
A)firm is in a long-run equilibrium when it produces 24 units of output.
B)firm is in a long-run equilibrium when it produces 32 units of output.
C)best the firm can do is sustain a loss of $48.
D)best the firm can do is earn a profit of $96.

Question

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

-Refer to Figure 16-2. Suppose ATC = $36 when Q = 24. Then the
A)firm is in a long-run equilibrium when it produces 24 units of output. 
B)firm is in a long-run equilibrium when it produces 32 units of output. 
C)best the firm can do is sustain a loss of $48. 
D)best the firm can do is earn a profit of $96.

Quizplus · Accepted Answer

In the long-run, a monopolistically competitive firm will produce where P = ATC. If the firm's ATC is $36 when producing 24 units of output, then it is at its long-run equilibrium where it is earning normal profits. If the firm were to produce more than 24 units of output, then it would have to increase its price to cover the higher ATC, causing it to lose customers to other firms. Therefore, the firm is in a long-run equilibrium when it produces 24 units of output.