The figure describes a monopolistic competitive market. Which of the following is correct?

Question

BlackTom AI · Accepted Answer

In monopolistic competition long-run equilibrium the firm's demand curve is tangent to its average cost (AC) curve at the profit-maximizing output, so price equals average cost and economic profit is zero.

Relevant concepts:
- Profit maximization: choose Q* where MR = MC.
- Price determination: the price charged is found on the demand curve at Q*, P = D(Q*).
- Economic profit per unit = P − AC(Q*); total economic profit = (P − AC) × Q*.
- Free entry and exit drive profits to zero in the long run, producing tangency between demand and AC.

Step-by-step reasoning using the diagram:
1) Identify Q*: MR intersects MC at the vertical dashed quantity (call it Q*). This is the profit-maximizing output because MR = MC.
2) Find price P: go up from Q* to the demand curve; that gives P = D(Q*). In the figure the horizontal dashed line shows that price.
3) Compare P with AC: the AC curve passes through exactly the same point on the demand curve (it is tangent there), so AC(Q*) = P.
4) Compute profits: per-unit economic profit = P − AC(Q*) = 0. Total economic profit = (P − AC) × Q* = 0 × Q* = 0.

Why the other answers are wrong:
- "Negative profit" would require P < AC at Q*; the diagram shows P = AC, not below it.
- "Positive profit" would require P > AC at Q*; the diagram shows no gap above AC, so there is no positive per-unit profit.

Conclusion: Because MR = MC at Q* and the demand curve is tangent to AC so that P = AC, each firm earns zero economic profit in this long-run monopolistic-competition equilibrium. This matches the provided correct answer: "Each firm must be making a zero profit."

The figure describes a monopolistic competitive market. Which of the following is correct?单项选择题

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