Question: User: AeroGlide Boards is a company that manufactures electronic skateboards in a monopolistically competitive market. The following graph shows the
demand curve, marginal revenue curve (MR), marginal cost curve (MC), and average total cost curve (ATC) for AeroGlide Boards.
Place the black point (plus symbol) on the graph to indicate the short-run profit-maximizing price and quantity for this monopolistically competitive
company. Then, use the green rectangle (triangle symbols) to shade the area representing the company’s profit or loss.
Monopolistically Competitive Outcome
Profit or Loss
PRICE (Dollars per e-skateboard)
QUANTITY (E-skateboards)
MC
MR
ATC
Demand
Given the profit-maximizing choice of output and price, AeroGlide is earning ____ profit, which means there are ____ sellers in the industry relative to the long-run equilibrium amount.
Now consider the long run in which e-skateboard manufacturers are free to enter and exit the market.
graph: The main graph is a center-left coordinate plot with four labeled curves; the demand curve is a downward sloping blue line from top-left to bottom-right, the MR curve is a steeper downward sloping black line from top-left to x-axis near 250, the MC curve is an orange U-shaped curve rising sharply on the right, and the ATC curve is a green U-shaped curve with its minimum near the center around (300, 200). The curves intersect near the center of the graph, and the position_hint is center.Show the possible effect of this free entry and exit by shifting the demand curve for a typical individual manufacturer of e-skateboards on the following graph.
PRICE (Dollars per e-skateboard)
QUANTITY (E-skateboards)
Demand
Demand
A downward-sloping demand line runs from the upper-left toward the lower-middle/right inside the graph area, with a small demand label near the middle-right of the line and another demand label near the upper-right; position_hint=top-left.
Which of the following statements are true for both monopolistically competitive markets and monopoly markets? Check all that apply.
Price is above marginal cost.
Firms earn zero profit in the long run.
Firms are not price takers.
Firms can earn positive profit in the long run.
1. **State the problem:** We analyze the short-run profit-maximizing output and price for AeroGlide Boards, a monopolistically competitive firm, and determine its profit or loss.
2. **Key formulas and concepts:**
- Profit maximization occurs where marginal revenue (MR) equals marginal cost (MC): $$MR = MC$$.
- Price is determined from the demand curve at the profit-maximizing quantity.
- Profit (or loss) per unit is $$P - ATC$$, where $$P$$ is price and $$ATC$$ is average total cost at that quantity.
- Total profit (or loss) is $$(P - ATC) \times Q$$.
3. **Short-run profit maximization:**
- Find quantity $$Q^*$$ where $$MR = MC$$.
- At $$Q^*$$, find price $$P^*$$ from the demand curve.
- Find $$ATC^*$$ at $$Q^*$$.
4. **Determine profit or loss:**
- If $$P^* > ATC^*$$, firm earns positive profit.
- If $$P^* < ATC^*$$, firm incurs loss.
- If $$P^* = ATC^*$$, firm breaks even.
5. **Interpretation from the graph description:**
- The MR and MC curves intersect near the center.
- The demand curve lies above ATC at the profit-maximizing quantity, indicating $$P^* > ATC^*$$.
- Therefore, AeroGlide earns positive short-run profit.
6. **Implications for the number of sellers:**
- Positive profit attracts new firms.
- Number of sellers is below the long-run equilibrium amount.
7. **Long-run adjustment:**
- Entry of new firms shifts the demand curve for each firm leftward.
- Demand curve shifts until $$P = ATC$$ and profit is zero.
8. **True statements for both monopolistically competitive and monopoly markets:**
- Price is above marginal cost.
- Firms are not price takers.
9. **False statements:**
- Firms earn zero profit in the long run (true for monopolistic competition but not monopoly).
- Firms can earn positive profit in the long run (true for monopoly but not monopolistic competition).
**Final answers:**
- AeroGlide is earning positive profit in the short run.
- There are fewer sellers than in the long-run equilibrium.
- In the long run, free entry shifts demand left, reducing profit to zero.
- True for both market types: Price > MC and firms are not price takers.