Question

2. Entry or exit in the long run 

Fantastique Bikes is a company that manufactures bikes in a monopolistically competitive market. The following graph shows Fantastique's demand curve, marginal revenue curve (MR), marginal cost curve (MC), and average total cost curve (ATC). 

Place the black point (plus symbol) on the graph to indicate the short-run profit maximizing price and quantity for this monopolistically competitive company. Then, use the green rectangle (triangle symbols) to shade the area representing the company's profit or loss.

Given the profit-maximizing choice of output and price, the shop is earning _______  profit, which means there are _______ shops in the industry than in long-run equilibrium.

Now consider the long run in which bike manufacturers are free to enter and exit the market.

Show the possible effect of free entry and exit by shifting the demand curve for a typical individual producer of bikes on the following graph,

Which of the following statements are true about both monopolistic competition and monopoly? Check all that apply.

• Firms earn zero profit in the long run.

• Firms are not price takers.

• Firms can earn positive profit in the long run.

• Price is above marginal cost.

Answer 1

Represent the graph as follows: 500 450 400 ATC 350 325 300 250 200 150 100 50 MC Demand MR 350 400 450 300 200 250 300 100 50 150 Quantity (Bikes). Given the profit maximizing choice of output and price, the shop is making negative profit, which means there are more shops in the industry relative to the long run equilibrium. Represent the graph as follows: Price (Dollars per bike)

Demand D2 Quantity (Bikes) There will be a rightward shift in the demand curve with the free entry and exit. The statements that are true about both monopolistic competition and monopoly are as follows: Firms are not price takers. Price is above marginal cost. Thus, the correct statement are options 2 and 4. Price (Dollars per bike)