Microeconomics Written Problem?

Question

Please help! I need to understand this

The market for peanut butter in Nutville is monopolistically competitive and in long-run equilibrium. One day, consumer advocate Skippy Jif discovers that all brands of peanut butter in Nutville are identical. Thereafter, the market becomes perfectly competitive and again reaches its long-run equilibrium.

Using an appropriate diagram, explain whether each of the following variables increases, decreases, or stays the same for a typical firm in the market. (Hint! Try drawing all the curves you might need on one graph and compare.)

A. Price
B. Quantity
C. Average total cost
D. Marginal Cost
E. Profit

Answer 1

When comparing firms that operating in monopolistically competitive markets to firms in perfectly competitive markets, begin by assuming that the firms' cost curves are identical (MC, ATC, AVC). The only relevant difference is in the firm's demand and marginal revenue curves.

For monopolistic competition, the firm's demand curve is downward sloping and its marginal revenue curve is downward sloping at twice the rate as the demand curve (MR fall below the demand). For the firm in perfect competition, demand and MR are both horizontal at the market price.

Because both firms are in long-run equilibrium, the demand curves for each are tangent to the firm's ATC.

The result, comparing the monopolistically competitive (monop comp) firm to the perfectly competitive (pc) firm is as follows:

Price: monop comp > pc

Quantity: monop comp < pc

ATC: monop comp > pc

MC: monop comp < pc

profit: monop comp = pc = 0