5 . How short-run profit or losses induce entry or exit

Citrus Scooters is a company that manufactures electric scooters in a monopolistically competitive market. The following graph shows the demand curve, marginal revenue curve (MR), marginal cost curve (MC), and average total cost curve (ATC) for Citrus.

Place the black point (plus symbol) on the graph to indicate the short-run profit-maximizing price and quantity for this monopolistically competitive company. Then, use the green rectangle (triangle symbols) to shade the area representing the company's profit or loss.

Monopolistically Competitive OutcomeProfit or Loss050100150200250300350400450500500450400350300250200150100500PRICE (Dollars per scooter)QUANTITY (Scooters)DemandMRMCATC

Given the profit-maximizing choice of output and price, Citrus Scooters is earning profit, which means there are sellers in the industry relative to the long-run equilibrium amount.

Now consider the long run in which scooter manufacturers are free to enter and exit the market.

Show the possible effect of this free entry and exit by shifting the demand curve for a typical individual producer of scooters on the following graph.

DemandPRICE (Dollars per scooter)QUANTITY (Scooters)Demand

Which of the following statements are true for bothmonopolistically competitive markets andmonopoly markets?Check all that apply.

Firms are not price takers.

Firms can earn positive profit in the long run.

Price is above marginal cost.

Firms earn zero profit in the long run.