1. Conslder a store that produces bagels in a monopollstically competitive marke
ID: 1118661 • Letter: 1
Question
1. Conslder a store that produces bagels in a monopollstically competitive market. The following graph shows Its demand curve (Demand), marginal revenue curve (MR), marginal cost curve (MC), and average cost curve (AC). Assume that the company is operating in the short run MC $3.50 AC 1.90-- Demand MRI 320 460 560 QUANTITY (Bagels per dayl The profit-maximizing level of output is bagels per day at a price of each. At the profit-maximizing output and price, the store's profit equals Given the profit-maximizing choice of output and there are price, the store is making profit, which means that stores in the industry relative to the long-run equilibrium.Explanation / Answer
The profit maximising condition is
MR=MC,
Therefore the profit-maximizing quantity will be 320 units of bagets.
Corresponding to this quantity on the demand curve the price will be determined and therefore the price will be=$2.50.
At profit maximising price and quantity, there will be Loss because AC cost is greater than the price at this quantity.
Hence profit will be negative = -( AC-Price) *Q
=- ( 3.50-2.50)*320
=-1*320
=-$320
The profit will be in negative because there is a loss of $230.
Since at profit-maximising price and quantity the profit is negative, therefore there will be less store in the industry in the short-run compare to the number of stores in the long-run equilibrium.
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