Attempts:4 Keep the Highest: 4/5 1. Profit maximization of a seller in a monopol
ID: 1113570 • Letter: A
Question
Attempts:4 Keep the Highest: 4/5 1. Profit maximization of a seller in a monopolistically competitive market Aa Aa Consider a store that produces bagels in a monopolistically competitive market. The following graph shows its demand curve (Demand), marginal revenue curve (MR), marginal cost curve (MC), and average total cost curve (ATC). Assume that the company is operating in the short run. PRICE (Dollars per bagel) MC 2.75- ATC 2.40 | 2.25 -- $2.10- $1.50 Demand MR 500 600 650 QUANTITY Bagels per day The profit-maximizing level of output is bagels per day at a price of eachExplanation / Answer
The profit maximising level of output is 500 bagels per day at a price of $2.75 each.
Reason: Profit maximising point of a monopolistically competitive is the point where Marginal Revenue (MR) = Marginal Cost (MC). The firm collects price where intersection between MC and Mr meets demand curve i.e. price equals $2.75 and quantity os 500.
At the profit maximising price, the store's profit = $2.75*500 - $2.25*500 which = $250
Reason: See at profit maximising point, the firm charges a price $2.75, so the firm earns revenue by selling 500 bagles, = 2.75*500 = 1375. Now the note the point where the intersection of MC and MR meets the ATC (Average total cost) curve which means the firm incurs a cost of $2.25 due to production of 500 bagels. Profit = Revenue - Cost, here revenue= 2.75*500 and cost= 2.25*500
Given the profit maximising choice of output and price, the store is making a positive or supernormal profit, which means that there are less stores in the industry relative to the long-run equilibrium.
Reason: If the firm made zero profit, it means that there are numerous firms in the industry and all firms are price takers. Whereas, if the firm makes positive profit, there are lesser number of firms in the industry and firm is a pice maker, so can charge a higher price, hence makes a good profit.
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