Graffiti Bikes is a company that manufactures bikes in a monopolistically compet
ID: 2496385 • Letter: G
Question
Graffiti Bikes is a company that manufactures bikes in a monopolistically competitive market. Assume that Graffiti is operating in the short run. The following graph shows Graffiti's demand curve (Demand), marginal revenue curve (MR), marginal cost curve (MC), and average total cost curve (ATC). Place the grey point (star symbol) on the graph to indicate the profit-maximizing price and quantity for the company. Drop lines will extend to both axes automatically. Then use the red rectangle (cross symbols) to shade the area representing the company's profit or loss. Now consider the long run, in which bike manufacturers can easily enter and exit the market. Show the possible effect of this easy entry and exit by shifting the demand curve for a typical individual producer of bikes on the following graph. (Tool tip: Click and drag the curve. It will snap into position, so if you try to move a curve and It snaps back to its original position, Just try again and drag it a little farther.)Explanation / Answer
Profit maximization occurs at the point of intersection of MR and MC curve.
Looking at the given diagram, this occurs where P*=$240 and Q*=20 units.
Profit = (P-ATC)Q = (240-280)20 = -$800
Thus, the firm is making losses.
With the firms in the industry making losses, many firms would exit the market in the long run. This would shift the demand curve of each producer to the right, as the demand facing other producers who do not exit the market would increase, since demanders would remain the same.
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