Chapter 9 Exercises Discussion Session #: First name: Last name: Section A: Monopolistic Competition A.1-A: Consider Brand X, a monopolistically competitive firm, depicted below. Note that we are dealing with the short-run situation in which firms are yet to enter or exit. Brand X: Short Run To maximize your learning, please use a ruler when drawing lines. MC ATC D1 E Quantity 0.5 E (1) Identify the firm's profit-maximizing output quantity and denote it as Q on the horizontal axis. (2) Identify the firm's profit-maximizing output price and denote it as P1 on the vertical axis. (3) Identify the firm's average total cost and denote it as ATC1 on the vertical axis. (4) Lightly shade the area for the firm's profit. (5) Given the profit, what will happen in the long run? A. The firm can block entry and, thus, will continue to earn positive economic profit. B. New firms will enter and will drive the firm's economic profit to zero. Answer:Co A.1-B: Again, Brand X is a monopolistically competitive firm. From A. I-A, we know that the firm is curre making a positive economic profit. Let's see how the industry will adjust in the long run. A.2: Brand X: Long Run To derive the CORRECT answers, use a ruler when drawing lines. 40 MC ATC D1 M 0.5 Q Quantity (1) The diagram shows the firm's original demand curve D1 in dashed line. What would happen to D1 as new firms enter? Shift left or shift right? Answer: (2) According to Siri, the new demand curve at the long-run equilibrium has a vertical intercept of W and a horizontal intercept of Q. Draw the new demand curve carefully by connecting the two intercepts (using a ruler). Denote the new demand curve at the long-run equilibrium by DLR. Draw the corresponding MR curve and denote it by MRLR. (3) Identify the firm's profit-maximizing output quantity and denote it as QLR on the horizontal axis. (4) Identify the firm's profit-maximizing output price and denote it as PIR On the vertical axis. (5) Identify the corresponding average total cost and denote it as ATCIR on the vertical axis. (6) What is the economic profit in the long run? Answer: (7) So, Siri was correct: the new demand curve (DLR) gives us the long-run equilibrium. Note that DLR is to the firm's ATC curve. Answer: Chapter 9 Excercises | Spring 2023