The following figure shows the revenue and cost curves for a monopolistic competitor before and after several new firms enter the industry. Dₒld shows the demand curve before the entry of new firms, and Dnₑw shows the demand curve after the entry of new firms.

-Refer to the figure above.Which of the following is true?

Question

The following figure shows the revenue and cost curves for a monopolistic competitor before and after several new firms enter the industry. Dₒld shows the demand curve before the entry of new firms, and Dnₑw shows the demand curve after the entry of new firms.
 
-Refer to the figure above.Which of the following is true?

Quizplus · Accepted Answer

Before the entry of new firms, the intersection of the demand curve (Dₒld) and marginal revenue curve (MR) is at point A where the marginal cost curve (MC) intersects the marginal revenue curve. The firm was earning positive economic profits as the price (P) was above the average total cost (ATC) at point B. After the entry of new firms, the demand curve shifts to Dnₑw, reducing the price to Pn and the quantity to Qn. The new equilibrium is at point C, where the marginal revenue curve intersects the new marginal cost curve (MCn). At this point, the price is equal to the average total cost, indicating that the firm is earning zero economic profits. Therefore, choice D is the correct answer.

The Following Figure Shows the Revenue and Cost Curves for a Monopolistic