The following graph shows a firm producing jeans in a monopolistically competitive market. The firm faces a downward-sloping, linear demand curve, D. The marginal revenue curve of the firm is shown by MR. AC and MC are the average total cost and marginal cost curves of the firm. Which of the following is likely to be true about the apparel industry?Figure 9.3:

Question

Quizplus · Accepted Answer

The graph shows the firm in monopolistic competition is producing at the profit-maximizing output level where marginal revenue equals marginal cost, and it charges a price higher than the marginal cost, where the demand and marginal revenue curves are intersecting the average total cost curve. The firm is earning a positive economic profit. However, in the long run, new firms are likely to enter the market attracted by the economic profit, increasing the competition, and reducing the demand for this firm's output, which will shift its demand and marginal revenue curves leftward. As a result, the firm will produce less output, charge a lower price, and earn only normal profits, where the demand and marginal revenue curves are tangent to the average total cost curve. At this point, the industry is at long-run equilibrium. Therefore, option C is the right answer. Option A is incorrect because new firms will not enter the industry in the short run due to the barriers to entry, such as branding or advertising. Option B is incorrect because existing firms will not exit the market in the short run since they are making an economic profit. Option D is incorrect because the firm is producing at a point where marginal cost equals marginal revenue, but it is not necessarily the minimum average total cost. Option E is incorrect because the price is higher than the marginal revenue.

The Following Graph Shows a Firm Producing Jeans in a Monopolistically