Question 1 (a)

  • Graph for a monopolistically competitive company

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


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

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

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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