3. Short -run outcomes, long -run entry and exit decisions Kitsch Bikes is a com

Question

3. Short -run outcomes, long -run entry and exit decisions Kitsch Bikes is a company that manufactures bikes in a monopolistically competitive market. Assume that Kitsch is operating in the short run. The following graph shows Kitsch's demand curve (Demand), marginal revenue curve (MR), marginal cost curve (MC), and average total cost curve (ATC). Place the grey point (star symbol) on the graph to indicate the profit -maximizing price and quantity for the company. Drop lines will extend to both axes automatically. Then use the red rectangle (cross symbols) to shade the area representing the company's profit or loss. Based on the graph, Kitsch is of per year. making a profit suffering a loss In the long run, bike manufacturers are free to enter and exit the market. Suppose that Kitsch decides to exit the market. On the following graph, show the effect of this decision on the demand curve for a typical individual producer of bikes. (Tool tip: Click and drag the curve. It will snap into position, so if you try to move a curve and It snaps back to its original position, just try again and drag it a little farther.) Which of the following correctly describes the conditions when the bike industry will reach long-run equilibrium? The persistent profits have been eliminated by the entry of new producers of bikes. The consumers' tastes converged to the most efficient bike model. The persistent losses have been eliminated by the exit of some firms.

Explanation / Answer

Monopolist produces where MR=MC and charges price where this quantity cuts AR curve.

Q=4 and P=240

profits= TR-TC

TR=price*quantity

TR= 240*4=960

TC= Q*ATC= 4 *280= 1120

Since TC>TR there is loss.

LOss=1120-960 160

Kitch is suffering a loss of 160 per year.

Since there is loss in the market, firm swill exit the market and teh ATC curve will decrease and continue till this touches the Demand curve. The long run equilibrium is when AR=AC and there are no profits and losses.

Therefore the persistent lossses have been eliminated by exit of some firms

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