1. (8 points) You are thinking of setting up a coffee shop. The market structure for coffee shops is monopolistic competition. There are three Starbucks shops and two other coffee shops very much like Starbucks in your town already. In order for you to have some degree of market power, you may want to differentiate your coffee shop. Thinking about the three different ways in which products can be differentiated, explain how you would decide whether you should copy Starbucks or whether you should sell coffee in a completely different way. 2. (16 points) Suppose the table below represents the demand and total cost for a monopolistically competitive firm. Note that, for simplicity, this rm has no fixed cost. a. What is the prot maximizing output level for this firm? What is their profit at that quantity? b. is this rm allocatively efcient? How do you know? C. Is this rm in long-run equilibrium? How do you know? 3. (10 points) Suppose the market for donuts is initially monopolistioally competitive. Then a law is passed that requires all donuts shops to be the same and to sell identical products. There are still many donut shop owners, but their services and products are identical. a. Why would we expect some \"excess capacity" in the original monopolistically competitive market? b. Would consumers be better off under the new market structure? What would consumers lose and what would they gain by switching to the new system? Would the donut shop owners be better off