Entry or exit in the long run

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.

Monopolistically Competitive OutcomeProfit or Loss050100150200250300350400450500500450400350300250200150100500PRICE (Dollars per bike)QUANTITY (Bikes)DemandMRMCATC475, 275

Given the profit-maximizing choice of output and price, the shop is earning profit, which means there are shops in the industry than in long-run equilibrium.

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

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

DemandPRICE (Dollars per bike)QUANTITY (Bikes)Demand

Which of the following statements are true about bothmonopolistic competition andmonopoly?Check all that apply.

Price equals average total cost in the long run.

Firms can earn positive profit in the long run.

Price is above marginal cost.

Firms are not price takers.