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8. Is monopolistic competition efficient? Suppose that a rm produces tennis racquets in a monopolistically competitive market. The following graph shows its monthly demand (d)
8. Is monopolistic competition efficient? Suppose that a rm produces tennis racquets in a monopolistically competitive market. The following graph shows its monthly demand (d) curve, marginal revenue (MR) curve, marginal cost (MC) curve, and average cost (AC) curve. Assume that all rms in the industry face the same cost structure . Place the tan point (dash symbol) on the graph to indicate the long-run monopolistically competitive equilibrium price and quantity for this rm. Next, place the purple point (diamond symbol) to indicate the point at which this firm would produce in the long run if it operated in a perfectly competitive market. Note: Dashed drop lines will automatically extend to both axes. 100 '- Monopolistic Competition Outcome '0 80 7o 60 Perfectly Competitive Outcome 50 40 30 PRICE (Dollars per racquet) 20 10 010 20 30 40 50 60 70 80 90100 QUANTITY (Thousands of racquets per month) Compare the average cost and the production level in the long-run equilibrium for a monopolistically competitive rm and a perfectly competitive rm by completing the following table. Average Cost Production Level Under... (Dollars per racquet) (Thousands of racquets per month) Monopolistic Competition Perfect Competition Because this market is a monopolistically competitive market, the rm's average cost in long-run equilibrium is V the long-run average cost it would achieve as a firm operating in a perfectly competitive market. The production level of a monopolistically competitive rm in long-run equilibrium is v the production level of a perfectly competitive rm. This difference in output is predicted by the v
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