1. If the firms in a monopolistically competitive market are earning economic profits or losses in the short run, would you expect them to continue doing so in the long run? Why?

2. Andrea's Day Spa began to offer a relaxing aroma therapy treatment. The firm asks you how much to charge to maximize profits. The demand curve for the treatments is given by the first two columns in Table 10.5; its total costs are given in the third column. For each level of output, you can calculate total revenue, marginal revenue, average cost, and marginal cost. The profit-maximizing level of output can be found at the point where TR - TC is greatest, or where MR = MC. What is the profit-maximizing level of output for the treatments and how much will the firm earn in profits?

PriceQuantityTC

$25.000$130

$24.0010$275

$23.0020$435

$22.5030$610

$22.0040$800

$21.6050$1,005

$21.2060$1,225

Table 10.5