Question

o Price and costs G MR Quantity a. Suppose this monopolistically competitive firm produces where there is productive efficiency. The resulting price and quantity combination is illustrated by which point on the graph? b. When producing at this point of productive efficiency, will the firm experience a normal profit or an economic profit? Explain your answer. C. Suppose the firm produces where there is allocative efficiency. The resulting price and quantity combination is illustrated by which point on the graph? d. When producing at this point of allocative efficiency, will the firm experience a normal profit or an economic profit? Explain your answer.

Answer 1

a) Productive efficiency is where output is produced at the lowest ATC. Point F is productive efficiency.

b) Normal profit since P = minimum ATC.

c) Allocative efficiency is where Marginal benefit, which is price, equals marginal cost.

Point H is allocative efficiency which is at the point where Demand = MC.

d) Profit sine P > ATC.