Explain why the following graph is likely to represent the long-run equilibrium for a representative firm in monopolistic competition. What will be the product price, output, and amount of economic profit?
What will be an ideal response?
In long-run equilibrium the monopolistic ally competitive firm will set price where MR=MC, so in this case the product price will be set at A and the output level will be D. The firm, however, will not earn an economic profit, but earn only a normal profit because the price is equal to where ATC is tangent to the demand curve. At the price, there will be no incentive for firms to enter or exit the industry.
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In the above figure, the demand curve for Good A shifts from D1 to D2 in Graph A when the price of Good B changes from P1 to P2 in Graph B. We can conclude that
A) Good A and Good B are substitutes. B) Good A and Good B are complements. C) Good A is a normal good but Good B is an inferior good. D) Good A and Good B are unrelated.
According to the text, the actual M2 multiplier in the United States today is
A) about 5. B) between 1.0 and 2.0. C) negative. D) over 10.