When a profit-maximising firm in a monopolistically competitive market is producing the break-even quantity: A. it will be earning economic profits B. its demand curve will be tangent to its average total cost curve C. its demand curve can be above, below or be tangent to its average total cost curve D. its marginal revenue will exceed marginal cost
Question
When a profit-maximising firm in a monopolistically competitive market is producing the break-even quantity: A. it will be earning economic profits B. its demand curve will be tangent to its average total cost curve C. its demand curve can be above, below or be tangent to its average total cost curve D. its marginal revenue will exceed marginal cost
Solution
The correct answer is B. When a profit-maximising firm in a monopolistically competitive market is producing the break-even quantity, its demand curve will be tangent to its average total cost curve.
Here's why:
A. It will not be earning economic profits. At the break-even point, total revenue equals total cost, so there are no profits.
B. The demand curve will be tangent to its average total cost curve. This is because at the break-even point, price (which is determined by the demand curve in a monopolistically competitive market) equals average total cost.
C. The demand curve cannot be above or below the average total cost curve at the break-even point. If the demand curve were above the average total cost curve, the firm would be making a profit. If it were below, the firm would be making a loss.
D. At the break-even point, marginal revenue equals marginal cost. This is the condition for profit maximisation, but in this case, the maximum profit is zero.
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