Question

I don't understand this Economics practice. Please help with whatever you can!

In-Class Practice: a) Draw a firm in Monopolistic Competition makine abnormal profits in the short run. 6) Assume these abnormal profits compel new firms to enter the market. Draw the impact that we increased number of producers has had on our firm's position in the market. c) Explain in words the position of our firm before and after the introduction of new firms into the market. a) Draw a firm in Monopolistic Competition making losses in the short run. b) Assume these losses compel firms to leave the market. Draw the impact that the decreased number of firms has had on our firm's position in the market. c) Explain in words the position of our firm before and after the introduction of new firms into the market.

Answer 1

Answer to question 1.

1.9 A profit maximizing monopolistic competitive Linn produces at the point where MR = me and Jets it's profit maximizing price at the point where profit maximizing quantity lies on the demand curve. If at profit maximizing output Level, price > ATC (ine. TRY TC), then the firm will get positive / abnormal economic profit, price a ATC TC Profit I MR Demand Quantity At brotit maximizing output level, Gi, Paisef Price (pt) ATC (Pi). The firm is earning positive profit shown by the shaded area on the graph b) This positive profit will attract other firms to the industry. Im LR entory of these firms will & demand for existing firm's products as now buyeng have other options to choose from P ime ATC Demand Xmen me Q2 Qt

ex As now at the profit maximizing output . Level (2) Price = ATC = P₂. Therefore our firsn now earms zero economic profit and operating in cong mun equilibrium.