Asked Dec 2, 2019

A profit -maximizing producer in the monopolistically competitive industry,currently in long run equlibrium. 

Draw a labeled profit-maximization graph 

  1. include labels of relevent cost and revenues curves (MC,ATC,MR,AR=D)
  2. Identify the profit maxizing quantity as Qpmp and price as Ppmp 
  3. Identify the socially optimal level of output as Qso

Expert Answer

Step 1

Since the monopolistic competition firm is in long run equilibrium, one needs to keep the following points in mind:

I) The fixed costs are not present and a firm can choose varying level of inputs and also the costs.

II) In long run, in a monopolistic competition market there is free exit and entry of the firms like in perfect competition market Firms, thus can leave markets if they suffer losses and new firms can enter into market if there are profits available.

Step 2

Since in long run there is free entry and exit, super normal profits go away and long run average cost curve becomes tangent to the AR curve.

Under perfect competition market, we get output which optimum socially hence, we take the ...

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