Demonstrate Graphically and Explain Verbally the Case of a Monopolistically

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The Answer is The monopolistically competitive firm determines its profit maximizing output level by producing where MR = MC (Q_M in the diagram). The firm determines its price by reading it off of the demand curve above Q_M (price is P_M in the diagram). The firm is earning a positive economic profit as shown by the filled in rectangle in the diagram.

The monopolistically competitive firm determines its profit maximizing output level by producing where MR = MC (Q<sub>M</sub> in the diagram). The firm determines its price by reading it off of the demand curve above Q<sub>M</sub> (price is P<sub>M</sub> in the diagram). The firm is earning a positive economic profit as shown by the filled in rectangle in the diagram. This represents a short-run equilibrium; in the long run there can be no positive economic profit for the firm since with easy entry in the long run other firms will enter in and compete away any short run positive economic profit. Therefore, the firm in long-run equilibrium will produce at Q<sub>LR</sub> with a price of P<sub>LR</sub>, as shown in the diagram above. In the short run, there is no difference between the equilibrium of a monopolist and a monopolistic competitor.

This represents a short-run equilibrium; in the long run there can be no positive economic profit for the firm since with easy entry in the long run other firms will enter in and compete away any short run positive economic profit. Therefore, the firm in long-run equilibrium will produce at Q_LR with a price of P_LR, as shown in the diagram above. In the short run, there is no difference between the equilibrium of a monopolist and a monopolistic competitor.

Demonstrate Graphically and Explain Verbally the Case of a Monopolistically

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Demonstrate Graphically and Explain Verbally the Case of a Monopolistically

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