Suppose that a firm produces polo shirts in a monopolistically competitive marke

Question

Suppose that a firm produces polo shirts 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. 90 Mon Comp Outcome T0 Min Unit Cost MR 0 10 20 30 40 50 60 70 80 100 QUANTITY (Thousands of shirts) 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 isthe efficient scale. True or False: This indicates that there is a markup on marginal cost in the market for shirts True False

Explanation / Answer

1.Price = Marginal cost

This is true, for the short-run, as well as, the long-run

The rule for maximizing output => Marginal Revenue = Marginal Cost

2. less than the efficient scale

3. True. The market is profit maximizing

4. The presence of product variety externality...... too little entry of new firms in the market

Product variety externality - Entry of a new firm, positive externality on consumers; consumer surplus is from the introduction of a new product

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