The monopolistically competitive firm's long‐run equilibrium situation is illustrated in Figure .
The entry of new firms leads to an increase in the supply of differentiated products, which causes the firm's market demand curve to shift to the left. As entry into the market increases, the firm's demand
curve will continue shifting to the left until it is just tangent to the average total cost curve at the profit maximizing level of output, as shown in Figure . At this point, the firm's economic profits are zero, and there is no longer any incentive for new firms to enter the market. Thus, in the long‐run, the competition brought about by the entry of new firms will cause each firm in a monopolistically competitive market to earn normal profits, just like a perfectly competitive firm.
Excess capacity. Unlike a perfectly competitive firm, a monopolistically competitive firm ends up choosing a level of output that is below its minimum efficient scale, labeled as point b in Figure . When the firm produces below its minimum efficient scale, it is under‐utilizing its available resources. In this situation, the firm is said to have excess capacity because it can easily accommodate an increase in production. This excess capacity is
the major social cost of a monopolistically competitive market structure.
____11.Refer to Exhibit 25-3. Total revenue of this profit maximizing monopolisticcompetitor is represented by the area
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____12.Which of the following assumptions do the market structures of monopolisticcompetition and perfect competition share?a.many buyers and sellersb.homogeneous productsc.difficult entry into the marketd.difficult exit from the market
____13.Excess capacity results from a
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____14.If the top four firms account for $25 million in sales and total industry sales are $87million, it follows that the four-firm concentration ratio is
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____15.The key behavioral assumption of the cartel theory is that oligopolists in the industryact as if
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