Profit maximization of a seller in a monopolistically competitive market Conside

Question

Profit maximization of a seller in a monopolistically competitive market Consider a shop that produces muffins In a monopolistically competitive market. The following graph shows its demand curve (Demand), marginal revenue curve (MR), marginal cost (MC), and average total cost curve (ATC). Assume that the company is operating in the short run. The profit-maximising level of output is muffins per day at a price of each. At the profit-maximising output and price, the shop's profit equals Given the profit-maximising choice of output and price, the shop is making profit, which means that there are shops in the industry relative to the long-run equilibrium.

Explanation / Answer

THE PROFIT WILL BE MAXIMUM AT THE POINT WHERE MR EQUALS MC. SO PROFIT MAXIMIZING LEVEL OF OUTPUT IS 500 MUFFINS PER DAY AT A PRICE OF $5.5.

SHOPS PROFIT WILL BE ($5.5 - $4.5) * 500 = $500.

THE SHOP IS MAKING $500 PROFIT WHICH MEANS THERE ARE FEW SHOPS IN THE MARKET.

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