2:50 PM courses.aplia.com nll Boost 22%) Fantastique Bikes is a company that man

Question

2:50 PM courses.aplia.com nll Boost 22%) Fantastique Bikes is a company that manufactures bikes in a monopolistically competitive market. The following graph shows Fantastique's demand curve, marginal revenue curve (MR) marginal cost curve (MC), and average total cost curve (ATC) Place the black point (plus symbol) on the graph to indicate the short-run profit-maximizing price and quantity for this monopolistically competitive company. Then, use the green rectangle (triangle symbols) to shade the area representing the company's profit or loss QUANTITY profit, shops in the industry than in long-run equilibrium. Given the profit-maximizing choice of output and price, the shop is earning which means there are- Now consider the long run in which bike manufacturers are free to enter and exit the market. Show the possible effect of free entry and exit by shifting the demand curve for a typical individual producer of bikes on the following graph QUANTITY Which of the following statements are true about both monopolistic competitiorn

Explanation / Answer

Monopoly is a market with one seller. So it has enough control to fix price. But it cannot control both price and quantities. It is buyers who will decide how many units they will buy at a price fixed by monopolist. if price fixed is high, then quantities demanded will be low. So demand curve of a monopolist has downnward slope. This demand curve is also known as average revenue curve, as it has downward slope. Due to this nature, Marginal revenue curve is also down ward sloping and it will lie below average revenue curve.

The objective of the firm is to maximze profit. It is achieve where-

1. MC and MR are equal and

2. MC curve has a slope greater than the slope of MR curve.

In diagram, it happens when MC curve curts MR from below.

In the diagram, MC has intersected MR at Quantity =150 bikes. It is profit maximizing quantity. At this quantity AR or price is $250. It is available from demand curve. Average cost (AC) is between 250 and 200. It is around 225. Thus AC exceeds AR by $250-$25=$25. It is economic profit per unit. As you know, normal profit is a part of AC as a factor cost. So anything above AC realized, is super /economic profit. As 150 bikes are sold total economic profit is-

Answer: Given the profit-maximizing choice of output and price, the shop is earning $3,750 profit which means there are more economic profit in the short run than in the long run.

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In the long run this economic profit will attract more firms in the industry. If the etry is made free, then they will enter and will gradually wipe off this economic profit. As a result Moopolist of short run will loss control on price. Instead of price maker. he will be a price taker. Price will be fixed by the interaction of demand and supply curve. So down ward demand curve will be horizotal. It will be tangent with the lowest point of long run average cost curve. So only normal profit is earned. So understated statements are true in the long run.

1. Firms are not price taker.

2 Price equals to ATC in the long run

3. Firm earns zero economic profit in the long run.

Note: last statement is not true. MC intersects AC at miimum point. So price and MC are equal.

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