1.3. The restaurant business in town is a monopolistically competitive industry in long-run equilibrium. One restaurant owner asks for your advice. She tells you that, each night, not all tables in her restaurant are full. She also tells you that if she lowered the prices on her menu, she would attract more customers and that doing so would lower her average total cost.

Should she lower her prices? Draw a diagram showing the demand curve, marginal revenue curve, marginal cost curve, and average total cost curve for this restaurant to explain your advice. Show in your diagram what would happen to the restaurant owner’s profit if she were to lower the price so that she sells the minimum-cost output.