1. Briefly describe two characteristics that a monopoly and a monopolistically competitive firm share.

2. If a monopolistically competitive firm is making zero economic profit what are the two explanations for why we consider it inefficient? Explain

3. Suppose the peanut butter industry which is monopolistically competitive was in long-run equilibrium. One morning the market woke up and it was transformed into a perfectly competitive industry. Now that all the perfectly competitive firms are in long run equilibrium, what would happen to the following variables (increase, decrease or stay the same)? (hint: you might want to look at a graphic comparison).

A. Price ___________________

B. Quantity _________________

C. Average Total Cost _______________

D. Marginal Cost _________________

E. Economic Profit _________________

4. Assume this is a monopolistically competitive firm in the short run.

Complete the graph. Label Price (P), Quantity (Q), Average Total Cost (ATC) and Average Variable Cost (AVC) on the graph based on the profit maximizing price and quantity you established on the graph. Then answer the questions based on your completely labeled graph.