1. In the short run, a monopolistically competitive firm produces at the optimal
ID: 1202372 • Letter: 1
Question
1. In the short run, a monopolistically competitive firm produces at the optimal level of output and is earning positive
economic profits. Which of the following describes how this firm will adjust in the long run?
a) The entry of new firms shifts the firm's demand and marginal revenue curves leftward, decreasing the firm's level
of output and the price the firm can charge until price equals average total cost.
b) The entry of new firms shifts the firm's marginal cost and average cost curves downward, decreasing the firm's
level of output and the price the firm can charge until price equals average total cost.
c) The entry of new firms shifts the firm's demand and marginal revenue curves leftward, decreasing the firm's level
of output and increasing the price the firm can charge until price equals average total cost.
d) The exit of firms shifts the firm's demand and marginal revenue curves rightward, increasing the firm's level of
output and the price the firm can charge until price equals average total cost.
2.(Figure: Possible Long-Run Outcome) In the figure Possible Long-Run Outcome, which price and quantity refer to a
potential long-run profit maximizing outcome for a firm producing in a monopolistically competitive market?
a) P1 and Q1
b) P2 and Q2
c) P1 and Q4
d) P1 and Q3
3.(Figure: The Restaurant Market) The figure The Restaurant Market shows curves facing a typical restaurant in a
community. Assume that many firms, differentiated products, and easy entry and easy exit characterize the restaurant
market. The restaurant shown here will maximize profits at quantity:
a) Q2.
b) Not enough information is given to answer the question.
c) Q3.
d) Q1.
Explanation / Answer
1. a) The entry of new firms shifts the firm's demand and marginal revenue curves leftward, decreasing the firm's level of output and the price the firm can charge until price equals average total cost.
2. a) P1 and Q1 (Because at this level of ouput MR = MC and firm earns normal profit)
3. a) Q2. (Because at this level of ouput MR = MC)
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