3. Is monopollstic competition efficlent? Suppose that a firm produces wooden tr

Question

3. Is monopollstic competition efficlent? Suppose that a firm produces wooden train engines in a monopolistically competitive market. The following graph shows Its demand curve, marginal revenue curve (MR), marginal cost curve (MC), and average cost curve (AC). Place a tan point (dash symbol) on the graph to indicate the long-run monopollstically competitive equillbrium price and quantity for this firm. Next, place a red point (cross symbol) to indicate the minimum unit cost the firm faces and the quantity associated with that cost. Dashed drop lines will automatically extend to both axes. MC 18 AC 12 10 Demand MR 0 10 15 20 25 30 35 40 45 50 Because this market is a monopolistically competitive market, the firm's average cost in long-run equilibrium is the minimum unit cost.

Explanation / Answer

In long run the monopolist can increase his scale of production and produce at a point on the long- run average cost curve (LAC) at which the short-run average cost is tangent to it. Thus the firm’s average cost is equal to the minimum unit cost.

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