The diagram at right shows the structure of cost and demand facing a monopolisti
ID: 1160263 • Letter: T
Question
The diagram at right shows the structure of cost and demand facing a monopolistically competitive firm in the short run. The profit-maximizing output level is units of output. (Enter your response as an integer.) The profit-maximizing pnce is S? (Enter your response as an $14 ATC integer.) Total revenue is $.(Enter your response as an integer) Total cost is S? (Enter your response as an integer) Total profit or loss is S? $13 $11 (Enter your response as an integer $7 and include a negative sign where appropriate.) In the long run, firms will 0 A. O B. 20 25 enter, shifting the demand facing the remaining firms to the left until the firms earn a normal profit enter, shifting the demand facing the remaining firms to the left until the firms earn an economic profit. C. exit, shifting the demand facing the remaining firms to the right unil the firms earn a normal profit. exit, shifting the demand fac ng the remaining firms to the right until the firms earn an economic profit. 0 D.Explanation / Answer
Profit maximizing output level occurs when Mr intersect MC. So profit maximizing output is Q = 20.
Profit maximizing price is P= $12 (locate Q=20 in the demand curve)
Total revenue = P*Q= 12*20= $240
Total cost at Q= 20 is ATC*Q= $14*20= $280
Profit = Total revenue-Total cost= 240-280= -$40 implying loss.
Due to losses, in the long run, firms will exit. As a result, demand faced by the other firms remaining in the market increases at all prices. This means that demand curve starts shifting to the right. This happens till the firms start earning normal profits.
So (c) is correct.