Many restaurants are not 100% full all day long, especially in the late morning and during the afternoon. Economists call this "excess capacity" and it is a characteristic result of monopolistic competition. What would restaurants have to do in order to be closer to 100% full all of the time? Why won't they do this? Let's compare monopolistic competition with perfect competition. a. Do competitive firms make profits in the short run? How about in the long run? b. Do monopolistically competitive firms make profits in the short run? How about in the long run? Is there a difference in profits between competition and monopolistic competition what accounts for it? d. Examine Figure 17.2. In the figure, what are the differences between monopolistic competition and competition? e. In Figure 17.2, one specific point represents the price we pay for product differentiation. What is it? FIGURE 17.2 Monopolistic Competition Competition Price Price Zero profits P- AC Zero profits AC Demand Demand Quantity Quantity monopolistically competitive firms produce where P AC and earn zero profits. Each firm in monopolistic competition offers a slightly different product and so each firm faces a downward-sloping demand curve As a result, firms under monopolistic competition charge prices above marginal cost, they produce a smaller quantity compared with competitive firms and Q is not at minimum average cost. In the case of competitive firms, each firm produces exactly the same product so there are perfect substitutes for each firm's products. As a result, the demand curve is perfectly elastic, production quantity is higher than under monopolistic competition, and output is at the point that minimizes average costs. Note that for comparison we show the monopolistic competition output level, Q M. Comp and the competitive output level, Q Comp in the right panel

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