Question

figure 13 - 10 shows cost and demand curves for a monopolistically competitive producer of iced tea. refer to figure 13 - 10, to answer the following questions. a. what is the profit - maximizing output level? b. what is the profit - maximizing price? c. at the profit - maximizing output level, how much profit will be realized? d. does this graph most likely represent the long run or the short run? why?

Explanation:

Step1: Identify profit - max condition

Profit is maximized when Marginal Revenue (MR) equals Marginal Cost (MC). In the graph, we find the intersection of MR and MC curves.

Step2: Determine output level

The output level at the intersection of MR and MC curves is the profit - maximizing output level. From the graph, it is 24 cases.

Step3: Find the price

Go vertically from the profit - maximizing output level (24 cases) to the demand curve, and then horizontally to the price - axis. The profit - maximizing price is 16.

Step4: Calculate profit

Profit = (Price - Average Total Cost)×Quantity. At 24 cases, price is 16 and average total cost (ATC) is 12. So, Profit=(16 - 12)×24 = 96.

Step5: Determine time - frame

In the short - run, firms in monopolistic competition can earn positive economic profits as shown in the graph (since price > ATC at the profit - maximizing output). In the long - run, entry of new firms will shift the demand curve leftward until economic profits are zero. So, this graph represents the short - run.

Answer:

a. The profit - maximizing output level is where MR = MC.
b. 24 cases
c. 16
d. 96
e. Short - run. Because price > ATC at the profit - maximizing output, indicating positive economic profits which are possible in the short - run but not in the long - run in monopolistic competition.