Aa Aa 4. How short-run profits or losses induce entry or exit Suppose that the m

Question

Aa Aa 4. How short-run profits or losses induce entry or exit Suppose that the market for bottles of wine is a monopolistically competitive market. For various annual production quantities, the following graph shows a typical firm's marginal cost curve (MC), average total cost curve (ATC), demand curve (Demand), and marginal revenue curve (MR) in the short run PRICE (Dollars per bottlel 50 45 40 35 30 25 20 15 10 MC ATC Demand MR 0 2 46 8 10 12 14 16 18 20 QUANTITY (Thousands of bottles per yearl According to the graph, a typical firm in this market is long run, firms will Therefore, in the the market. Now suppose the following graph shows a typical firm's marginal cost curve (MC), average total cost curve (ATC), demand curve (Demand), and marginal revenue cure (MR)

Explanation / Answer

1) Loss making (Since ATC curve lies above demand curve)

2) exit the market (because of high losses)

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1) 8 bottles of wine (point of intersection of MR-MC curves)

2) at the minimum cost level of output (since ATC = Demand)

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