Suppose that a firm produces tennis racquets in a monopolistically competitive m

Question

Suppose that a firm produces tennis racquets in a monopolistically competitive market. The following graph shows its demand (D) curve, marginal revenue (MR) curve, marginal cost (MC) curve, and long-run average total cost (LRATC) curve. Assume that all firms in the industry face the same cost structure. Place the tan point (dash symbol) on the graph to indicate the long-run monopolistically competstive equlbrium price and quantity for this firm. Next, place the purple point (diamond symbol) to indicate the point at which this firm would produce in the long run if it operated in a perfectly competitive market Note: Dashed drop lines will automatically extend to both axes. 100 90 80 70 60 50 40 30 20 10 Monopolistic Competion Outcome Perfect Competition Outcome TC AR

Explanation / Answer

Monopolist produces where MR=MC i.e. Q=50 thousand and AC=60$ per racquet

Perfect competition produces upto a point where P=MC because P=MR. Thus Q=65 and AC=55

In monopolistically competitive firm ATC in long run is higher than perfectly competitive firm

Production levelnof monopolistically competitive firm is less as compared to perfectly competitive

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