i) Use the graph below to explain the output,
A monopolistic competitive firm will be in equilibrium when its profit is maximized or loss is minimized. For this following condition must be satisfied:
- MR = MC
- Slope of MC > Slope of MR
i)
Firm 1:
As shown in above diagram the profit maximizing output and price is determined by the intersection of marginal revenue and marginal cost curve. At the point of intersection the profit maximizing price is 20 and output is 40
As shown in diagram Average Total Cost associated with the profit maximizing output and price is 17.5
We have
Price (P) = 20
Quantity (Q) = 40
Average Total Cost (ATC) = 17.5
We know that
Profit = Q * [P - ATC]
Profit = 40 * [20 - 17.5]
Profit = 100
The Firm 1 is earning profit.
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