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Marginal Revenue 1 Figure 2 depicts a situation in a monopolistically competitive market
Marginal Revenue 1 Figure 2 depicts a situation in a monopolistically competitive market. MC 100 95 + 90+ ATC ES 80 75 70 35 50 40 35 30 25 20 15+ 10+ 5 MR Demand 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100105110113120 > Refer to Figure 2. How much profit will the monopolistically competitive firm earn in this situation? ? $400 B No profit, since monopolistically competitive firms never earn economic profit ? $200 profit A D $10 profit
Expert Solution
The answer is (C) " $200 "
We know that that a monopolist maximizes its profit at that level where :-
MR = MC
Thus in the above given diagram, we will check the point where MR = MC. It is clear from the diagram that at the profit maximization price is $60 and the profit maximization quantity is 20.
Now to find the profit, we need to find the per unit price. To find that price, move vertically up from the profit maximization point up till the demand curve. The correspnding price is the per unit price which is $80.Now we can see that the per unit price is greater than the average total cost which is $70 thus the firm earns profit
Profit is given by the reactangular area and the numerical value is given as:-
Profit = Per unit price * Quantity
= ( 80 - 70 ) * 20
= 10 * 20 = $200
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