Question

Suppose that a firm produces baseball bats in a monopolistically competitive market. The following graph shows its demand curve, marginal revenue (MR) curve, marginal cost (MC) curve, and average total cost (ATC) curve.

Place a block point (plus symbol) on the graph to indicate the long-run monopolistically competitive equilibrium price and quantity for this firm. Next, place a grey point (star symbol) to indicate the minimum average total cost the firm faces and the quantity associated with that cost.

Because this market is a monopolistically competitive market, you can tell that it is in long-run equilibrium by the fact that _______ optimal quantity for each firm. Furthermore, a monopolistically competitive firm's average total cost in long-run equilibrium is _______ the minimum average total cost.

 

True or False: This indicates that there is excess capacity in the market for bats. 

Monopolistic competition may also be socially inefficient because there are too many or too few firms in the market. The presence of the _______ externality implies that there is too much entry of new firms in the market.

Answer 1

Ans.

profit maximizing level of output is where MR = MC , which is the equilibrium point.

100 90 Mon Comp Outcome * 2 Min Unit Cost 50 PRICE (Dollars per bat) 50 10 ATC 20 10 MC VR Deland 10 20 40 70 QUANTITY (Thousands of bats)

From the above graph . we can asnwer the blanks.

1st Blank - P = ATC , at this level zero economic profits exist.

2nd Blank - greater than

Multiple choice - Correct Option is True.

3rd Blank - business stealing , as too many business are entering the market.

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