5 . How short-run profit or losses induce entry or exit Fantastique Bikes is a company that manufactures bikes in a monopolistically competitive market. The following graph shows Fantastique's demand curve, marginal revenue curve (MR), marginal cost curve (MC), and average total cost curve (ATC). 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. (? ) Your Answer Correct Answer 500 X Monopolistically Competitive Outcome X Profit or Loss PRICE (Dollars per bike) 100 1 QUANTITY ( Bikes) K Points: 0/ 1 Explanation: Close Explanation ~ A firm in a monopolistically competitive market chooses its short-run production quantity by setting marginal revenue equal to marginal cost, which occurs at 175 bikes in this case. The firm will then charge the price on the demand curve that corresponds to a quantity of 175 bikes, which is the maximum price that it can charge ($275 per bike). Profit is equal to total revenue minus total cost: Profit = Total Revenue - Total Cost = Price x Quantity - Average Total Cost x Quantity - (Price - Average Total Cost) x Quantity Therefore, the correct answer on the graph shows profit as the area between $275 and $375, up to 175 bikes. Because the average total cost ($375 per bike) is more than the price ($275 per bike) at the profit-maximizing quantity, Fantastique Bikes is suffering from a loss in this case. Given the profit-maximizing choice of output and price, the shop is making _positive X profit, which means there are fewer X shops in the industry relative to the long-run equilibrium. K Points: 0/ 1 Explanation: Close Explanation ~ In the short run, a firm in a monopolistically competit re more firms in the market than would be the case in long-run equilibrium. As more con petitors exit the market, the demand for bikes from any given bike shop will increase, and each bike shop will sell more bikes at any giver e market entry is easy, the typical monopolistically competitive firm earns zero profit in the long run. Now consider the long run in which bike 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 bikes on the following graph. (? Your Answer Correct Answer O- X Demand PRICE (Dollars per bike) D2 QUANTITY (Bikes) K Points: 0/1 Explanation: Close Explanation ~ The exit of some producers from a monopolistically competitive market will lead to a rightward shift of the demand curve for a typical producer. That is, given that a typical from a loss in the short run, some firms will have an incentive to exit the market in the long run. Since the nu rom decreases, the demand faced by each firm already in the market increases beca competition. Thus, at any given price, quantity demanded for each firm rises. Which of the following statements are true about both monopolistic competition and monopolies? Check all that apply. Price equals average total cost in the long run. V Firms are not price takers. V O Firms earn zero profit in the long run. X _ Firms can earn positive profit in the long run. K Points: 0.75 / 1 Explanation: Close Explanation ~ A monopolistically competitive market is characterized by the following attributes: . Many sellers . Product differentiation . Free entry Under monopolistic competition, many firms compete for the same group of customers. Additionally, each firm produces a product that is at least slightly different from those of other firms, while free entry into the market allows firms to enter (or exit) the market without restriction. Because of these characteristics, firms under monopolistic competition reser monopolists in that they are not price takers. Rather, they face a downward-sloping demand curve for their product; thus, the profit-max rice is always higher than marginal cost. However, profit for each firm is driven to zero in the long run, as the demand for each firm's product adjusts with the entry and exit of other firms until price equals average total cost