Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Firms earn zero economic profit due to free entry and exit.
B
Firms can make supernormal profits as long as demand exceeds marginal costs.
C
Firms produce at the minimum average cost.
D
Firms face horizontal demand curves.
Understanding the Answer
Let's break down why this is correct
Answer
In a monopolistically competitive market, a firm's short-run equilibrium occurs when it maximizes its profit by producing the quantity of goods where its marginal cost equals marginal revenue. This means the firm decides how much to produce based on the additional cost of making one more unit and the additional revenue it gets from selling that unit. At this point, the firm can either make a profit, break even, or incur a loss, depending on its average total cost compared to the price it charges. For example, if a coffee shop finds that it can sell 100 cups of coffee at $3 each, but its average total cost is $2. 50 per cup, it will make a profit of $0.
Detailed Explanation
In the short run, firms can earn extra profits when they sell more than it costs to make their products. Other options are incorrect because Some might think firms always earn zero profit in the short run; It's a common mistake to think firms always produce at their lowest cost.
Key Concepts
short-run equilibrium
market structure
Topic
Monopolistic Competition Analysis
Difficulty
medium level question
Cognitive Level
understand
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