Question

Suppose that a firm produces tennis racquets in a monopolistically competitive market. The following graph shows its demand curve (D), marginal revenue curve (MR), marginal cost curve (MC), and long-run average cost curve (LRAC). Assume that all firms in the industry face the same cost structure.

Place the tan point (dash symbol) on the graph to indicate the long-run monopolistically competitive equmbrium price and quantity for this firm. Next, place the purple point (diamond symbol) to indicate the point at which this firm would produce in the long run if it operated in a perfectly competitive market.

Note: Dashed drop lines will automatically extend to both axes.

Answer 1

Monopolistic competitive firm produces at the point AC = AR(D) in the long run: Point A Perfectly competitive firm produces at the point P(D)= MC in the long run: Point B Monopolistic Competition Outcome Perfect Competition Outcome PRICE, COSTS, AND REVENUE (Dollars per racquet) QUANTITY(Thousands of racquets per month Table is below: AC 70 50 Under Monopolistic competition Perfect competition 65 65 Greater than Less than Excess capacity