Questions: UNIT 3 - CHALLENGE 3.1: Market Structures Consider the graph below. Suppose qMC = 500, pMC = 20, and ATC = 20 at 500 units. Is the profit-maximizing firm in monopolistic competition making a profit or loss, and by how much? a) 1,000 profit b) Zero economic profit, or normal profit

UNIT 3 - CHALLENGE 3.1: Market Structures

Consider the graph below. Suppose qMC = 500, pMC = 20, and ATC = 20 at 500 units. Is the profit-maximizing firm in monopolistic competition making a profit or loss, and by how much?

a) 1,000 profit

b) Zero economic profit, or normal profit

Transcript text: UNIT 3 - CHALLENGE 3.1: Market Structures Consider the graph below. Suppose qMC = 500, pMC = $20, and ATC = $20 at 500 units. Is the profit-maximizing firm in monopolistic competition making a profit or loss, and by how much? a) $1,000 profit b) Zero economic profit, or normal profit

Solution

Solution Steps

Step 1: Find the profit-maximizing quantity and price.

The profit-maximizing quantity (qMC) is where Marginal Revenue (MR) equals Marginal Cost (MC). The graph shows this quantity as 500. The corresponding price on the demand curve is $20 (PMC).

Step 2: Determine the Average Total Cost (ATC) at the profit-maximizing quantity.

The problem states that ATC = $20 at 500 units.

Step 3: Calculate Profit.

Profit is calculated as (Price - ATC) * Quantity. In this case: (\$20 - \$20) * 500 = \$0.