Figure 16-10
The figure is drawn for a monopolistically-competitive firm.
-Refer to Figure 16-10. The firm's maximum profit is
A)$-7,000.
B)$-5,000.
C)$-2,000.
D)The firm's maximum profit cannot be determined from the figure.

Question

Figure 16-10
The figure is drawn for a monopolistically-competitive firm. 
-Refer to Figure 16-10. The firm's maximum profit is
A)$-7,000. 
B)$-5,000. 
C)$-2,000. 
D)The firm's maximum profit cannot be determined from the figure.

Quizplus · Accepted Answer

The firm's maximum profit occurs when it produces where marginal revenue (MR) equals marginal cost (MC), which is at output level Q1. At this level, the firm's price (P1) is greater than its average total cost (ATC1), indicating that it is earning a profit. However, this profit is not as large as it could be if the firm were a perfect competitor, as it is still experiencing some degree of market power in the form of differentiated products. Therefore, the firm's maximum profit is -$2,000.

Figure 16-10 The Figure Is Drawn for a Monopolistically-Competitive Firm