Suppose that a firm produces wooden train engines 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.

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Chapter16: Monopolistic Competition
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3. Is monopolistic competition efficient?
Suppose that a firm produces wooden train engines 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.
?
PRICE (Dollars per engine)
100
90
80
70
50
40
30
20
10
0
0
MC
10
ATC
MR
20 30 40 50 60 70
QUANTITY (Thousands of engines)
80
Demand
90 100
++
Mon Comp Outcome
Min Unit Cost
Because this market is a monopolistically competitive market, you can tell that it is in long-run equilibrium by the fact that
optimal quantity for each firm. Furthermore, a monopolistically competitive firm's average total cost in long-run equilibrium is
minimum average total cost.
at the
▼ the
Transcribed Image Text:3. Is monopolistic competition efficient? Suppose that a firm produces wooden train engines 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. ? PRICE (Dollars per engine) 100 90 80 70 50 40 30 20 10 0 0 MC 10 ATC MR 20 30 40 50 60 70 QUANTITY (Thousands of engines) 80 Demand 90 100 ++ Mon Comp Outcome Min Unit Cost Because this market is a monopolistically competitive market, you can tell that it is in long-run equilibrium by the fact that optimal quantity for each firm. Furthermore, a monopolistically competitive firm's average total cost in long-run equilibrium is minimum average total cost. at the ▼ the
True or False: This indicates that there is excess capacity in the market for engines.
True
False
Monopolistic competition may also be socially inefficient because there are too many or too few firms in the market. The presence of the
product variety externality implies that there is too much entry of new firms in the market.
Transcribed Image Text:True or False: This indicates that there is excess capacity in the market for engines. True False Monopolistic competition may also be socially inefficient because there are too many or too few firms in the market. The presence of the product variety externality implies that there is too much entry of new firms in the market.
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