2. How short-run profit or losses induce entry or exit Fantastique Bikes is a co

Question

2. How short-run profit or losses induce entry or exit 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 500 450 400 350 300 250 w 200 150 100 Monopolistically Competitive Outcome Profit or Loss TC 50 MR Dema 0 50 100 150 200 250 300 350 400 450 500 QUANTITY (Bikes) Given the profit-maximizing choice of output and price, the shop is making profit, which means there are shops in the industry relative to the long-run equilibrium Now consider the long run in which bike manufacturers are free to enter and exit the market.

Explanation / Answer

In both the firms, price is more than marginal cost and the reason is that both have monopoly and can demand more money.

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