Figure 10.5 shows the demand, marginal revenue, and cost curves for a monopolistically competitive firm. At the profit-maximizing (or loss-minimizing) output and price, the firm would: Figure 10.5. Price 3.25 3.00 2.50 0 700 Quantity 1,000 MC MR ATC D AR be earning zero economic profit. be earning an economic profit. be earning an economic loss. be better off shutting down since total revenue does not cover fixed costs. O have to expand to stay in business in the long run.

ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
icon
Related questions
Question
**Figure 10.5** illustrates the demand, marginal revenue, and cost curves for a monopolistically competitive firm. It poses a question about the firm's economic status at its profit-maximizing (or loss-minimizing) level of output and price.

**Diagram Description:**

- The horizontal axis represents Quantity, ranging from 0 to about 1,000 units.
- The vertical axis represents Price, ranging from $2.50 to $3.25.
- **Demand Curve (D = AR):** Slopes downward from left to right, indicating a typical demand scenario where higher quantities are demanded at lower prices.
- **Marginal Revenue (MR):** Also slopes downward but is steeper than the demand curve.
- **Marginal Cost (MC):** Upward sloping, crossing the MR curve from below.
- **Average Total Cost (ATC):** U-shaped curve, indicating economies and diseconomies of scale, and crosses the demand curve above the MR curve.

**Key Points in the Graph:**

- The intersection of the MR and MC curves determines the profit-maximizing quantity.
- The corresponding point on the demand curve (D = AR) at this quantity level gives the price the firm can charge.
- The ATC curve lies above the price at the profit-maximizing quantity, indicating that average total costs exceed price.

**Question Options:**
1. Be earning zero economic profit.
2. Be earning an economic profit.
3. Be earning an economic loss.
4. Be better off shutting down since total revenue does not cover fixed costs.
5. Have to expand to stay in business in the long run.

Based on the graph, the firm would be earning an economic loss (Option 3), as the price (from the demand curve) is less than the average total cost at the profit-maximizing output level.
Transcribed Image Text:**Figure 10.5** illustrates the demand, marginal revenue, and cost curves for a monopolistically competitive firm. It poses a question about the firm's economic status at its profit-maximizing (or loss-minimizing) level of output and price. **Diagram Description:** - The horizontal axis represents Quantity, ranging from 0 to about 1,000 units. - The vertical axis represents Price, ranging from $2.50 to $3.25. - **Demand Curve (D = AR):** Slopes downward from left to right, indicating a typical demand scenario where higher quantities are demanded at lower prices. - **Marginal Revenue (MR):** Also slopes downward but is steeper than the demand curve. - **Marginal Cost (MC):** Upward sloping, crossing the MR curve from below. - **Average Total Cost (ATC):** U-shaped curve, indicating economies and diseconomies of scale, and crosses the demand curve above the MR curve. **Key Points in the Graph:** - The intersection of the MR and MC curves determines the profit-maximizing quantity. - The corresponding point on the demand curve (D = AR) at this quantity level gives the price the firm can charge. - The ATC curve lies above the price at the profit-maximizing quantity, indicating that average total costs exceed price. **Question Options:** 1. Be earning zero economic profit. 2. Be earning an economic profit. 3. Be earning an economic loss. 4. Be better off shutting down since total revenue does not cover fixed costs. 5. Have to expand to stay in business in the long run. Based on the graph, the firm would be earning an economic loss (Option 3), as the price (from the demand curve) is less than the average total cost at the profit-maximizing output level.
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 3 steps

Blurred answer
Knowledge Booster
Marginal Approach
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
Economics
ISBN:
9780190931919
Author:
NEWNAN
Publisher:
Oxford University Press
Principles of Economics (12th Edition)
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (MindTap Course List)
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-…
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education