Question 1 (a)

  • Graph for a monopolistically competitive company

    • Since the company have excess capacity, it operates to the left of minimum-cost output

    MC ATC QUANTITY

Question 1 (c)

  • In the long-run, economic profits will fall to zero for a monopolistically competitive company.

    Short Run Equilibrium with Monopolistic Competition PI is the profit maximising price and QI is the equilibrium output Price, Cost MC AC AR Output

    Long Run Equilibrium with Monopolistic Competition Profits are competed away as demand shifts inwards to AR2 Price, Cost 1 AC AR2 MR2 Output

Question 1 (e)

  • In the long run, will the company be operating in a region where economies of scale exist? Explain.

    • One point is earned for stating yes.

    • One point is earned for explaining that the firm produces a quantity of output in the declining portion of its long-run ATC.

    Monopolistic Competition Profit-Maximizing in Monopolistic Competition in Long Run MC LRATC 11 = TR - TC = OPAQ - OPAQ 16

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