Imagine that a firm produces bikes in a monopolistically competitive market. The following graph shows its demand curve, marginal revenue curve (MR), marginal cost curve (MC), and average total cost curve (ATC).

1) The long-run monopolistically competitive equilibrium price for this firm is:

P1

P2

P3

2) and the long run equilibrium quantity for this firm is:

Q1

Q2

Q3.

3) The minimum average total cost that the firm faces is:

P1

P2

P3

4) and the quantity associated with this cost is:

Q1

Q2

Q3.

5) Because this market is a monopolistically competitive market, you can tell that it is in long run-equilibrium by the fact that:

MR=MC

P>ATC

P=ATC

P=MC

at the optimal quantity for each firm.

6) Furthermore, the quantity the firm produces in long-run equilibrium is:

equal to

greater than

less than

the efficient scale.

7) This indicates that there is a markup on marginal cost in the market for bikes:

False? True?

8)Monopolistic competition may also be socially inefficient because there are too many or too few firms in the market. The presence of the:

business stealing

product variety

externality implies that there is too little entry of new firms in the market.

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