Question

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.

• Price is above marginal cost.

• Firms can earn positive economic profit in the long run.

• Firms earn zero economic profit in the long run.

• Firms are not price takers.

Answer 1

Given the profit-maximizing choice of output and price, the shop is makingnegative   profit, which means there aremore   shops in the industry relative to the long-run equilibrium.

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

Price is above marginal cost.

Firms are not price takers.

Firms can earn positive profit in the long run.

Price equals average total cost in the long run.

Answer 2