Question

LMC MR AR 0 Output 5. A. Name of Market Structure? (3 points) b. Ability to control prices. (3 points) c. Spending on advertising and marketing (3 points) d. Pure profit, Normal profit or losses. (3 points)

Answer 1

(A) This is monopolistic competition in long run.

A long-run monopolistic competitive firm output is determined at intersection of MR and MC curves. The corresponding price is equal to ATC, so AR and ATC intersect at the profit-maximizing output, as is shown in graph.

(B) A monopolistic competitive firm is a price-setter who faces a downward sloping demand curve, so the firm is able to set and control its own price.

(C) In monopolistic competitive market, each firm sells a slightly differentiated product, which makes the demand for their product relatively inelastic. Advertising and marketing is the most common tool that firms use for differentiating their products.

(D) In short run, firms can make economic profit, economic loss or break-even depending on whether price is higher than, lower than or equal to ATC. But in long run, free entry and exit makes the firms produce an output for which Price equals ATC, so there is no economic profit and firms earn only normal profit.