4 Is monopolistic competition efficient Suppose that a frm p

4. Is monopolistic competition efficient? Suppose that a frm produces polo shirts in a monopolsicaly cometive market The folowing prph shoms s damand curve, margnal 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 mo place a grey point (star symbol) to indicate the minimum average total cost the firm faces and the quantity associated with that cost competitive price and quantity for this firm. Next Mon Comp Outcome s 70 Min Unit Cost TC MR 0 10 20 30 40 50 7O 80 0100 by the fact that P ATCat the RA Because this market is a mo

Solution

a) The graph is placed correctly.

b) For a firm under monopolistic competition, the price is equal to the Average total cost and the economic profit they earn is Zero. (as higher profit attracts more and more new firms in the market increasing supply and decreasing the price and thereby profit.)

c) IN the long run, the average total cost is higher than the minimum average total cost. (your answer less than is wrong, the minimum point is where you have placed a star in the graph and the actual point is where you have placed the plus sign. )

d) \"True\"

There is an excess capacity in the market with monopolistic competition.

e) \"Product variety\" The presence of product variety indicates too many firms entering the market.