5. Monopolistic competition versus perfect competition Aa Aa Suppose that a firm

Question

5. Monopolistic competition versus perfect competition Aa Aa Suppose that a firm produces wall calendars in a monopolistically competitive market. The following graph shows its demand curve (Demand), marginal revenue curve (MR), marginal cost curve (MC), and average total cost curve (ATC). 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 competitive equilibrium price and quantity for this firm.Next, place the red point (cross symbol) to indicate the point at which this firm would produce in the long run if it operated in a perfectly competitive market. (Dashed drop lines will automatically extend to both axes for each point.) PRICE, COST, MR IDallars per calendarl McMonComp Outcome 18 PC Outcome ATC 12 Demand 020 40 60 80 100 120 140 160 180 200 QUANTITY IThousands of calendars per monthl Hel Clear All Because this market is a monopolistically competitive market, the frm's average total cost in long-run equilibrium is the average total cost it would achieve as a firm operating in a perfectly competitive market. Because this market is a monopolistically competitive market, the firm's production level in long-run equilibrium is the production level it would achieve as a firm operating in a perfectly competitive market. This difference in output is known as the competitive firm F7 3 4

Explanation / Answer

If it had been perfectly competitive market then P=10 and Q=130

In monopolistically competitive market, P=12 and Q=100 because at Q=100, MR=MC

Monopolistically ATC is higher as compared to perfect competition becasuse in perfect competition firm produces at min of AC whereas monopolistically firm produces where MR=MC

Output of monopolistic is lower as compared to perfect competition due to which there is DWL

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