Your friend Stan owns a coffee shop in a town with many competing coffee shops in...
Your friend Stan owns a coffee shop in a town with many competing coffee shops in a monopolistically competitive industry. One day Stan tells you (an economist) that he is earning an economic profit and is currently setting his price equal to his marginal cost. Is Stan producing the profit-maximizing amount of coffee? What should he do?
Homework Answers
A competitive firm produces maximizes profits when when it sets a price that is equal to MC.At this price though,the firm can earn economic profits or losses depending on the average cost.
If he is earning profits at this level and is earning economic profits then he should continue producing the same quantity.
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