Question

Suppose that a firm produces wooden train engines 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 black 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 _______ at the optimal quantity for each firm. Furthermore, the quantity the firm produces in long-run equilibrium is _______ the efficient scale. 

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

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 little entry of new firms in the market.

Answer 1

Answer 2