ECON205 Homework09 S09

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Conditions fo, monopolistic competition
Consider the monopolistically competitive market structure, which has some features of perfect competition and some features of monopoly.
A monopolistically competitive market has the following attributes: product differentiation, free entry, and many sellers

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Explanation:

A

Monopolistic competition has the attribute that there are many firms competing for the same group of customers.
Similar to monopolists, firms under monopolistic competition are not price takers. Rather, they face a downward-sloping demand curve for their product. Profit for each firm is driven to zero in the long run as the demand for each firm's product adjusts with the entry and exit of other firms.

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2. Profit maximization of a seller in a monopolistically competitive market
Consider a shop that produces bagels in a monopolistically competitive market. The graph below shows its demand curve (labeled Demand){ marginal revenue curve (labeled MR){ marginal cost curve (labeled MC), and average total cost curve (labeled ATC). Assume that the company is operating in the short run.

DOLLARS (Dollars per bagell

Me

$7.00

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ATC

$5.50
$5.00

$3.80

$2.00

Demand

MR
480

690

840

QUANTITY [Bagels per dayl

The profit-maximizing

level of output is

480 '"

bagels per day at a price of

$5.00 '"

each.
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Explanation:

A

Similar to a monopolist, the shop will produce up to the point where marginal cost equals marginal revenue. The intuition behind this is identical-the

shop will continue to produce as long as the additional revenue gained from

producing another unit (marginal revenue) exceeds or exactly equals the additional cost of producing that unit
(marginal cost). This occurs at 480 bagels, and the corresponding price on the demand curve equals $5.00 per bagel.

At the profit-maximizing

output and price,