Question: 3. How short-run profit or losses induce entry or exit
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
0
50
100
150
200
250
300
350
400
450
500
500
450
400
350
300
250
200
150
100
50
0
PRICE (Dollars per e-skateboard)
QUANTITY (E-skateboards)
Demand
MR
MC
ATC
Area: 1250
1. **State the problem:** We need to find the short-run profit-maximizing price and quantity for AeroGlide Boards, a monopolistically competitive firm, and determine the profit or loss area.
2. **Key concepts:**
- The profit-maximizing quantity is where marginal revenue (MR) equals marginal cost (MC): $$MR = MC$$.
- The price is found from the demand curve at that quantity.
- Profit or loss per unit is the difference between price and average total cost (ATC) at that quantity.
- Total profit or loss is: $$\text{Profit} = (P - ATC) \times Q$$.
3. **Find the profit-maximizing quantity:**
- Locate the intersection of MR and MC curves.
- Suppose this quantity is $$Q^*$$.
4. **Find the price:**
- At $$Q^*$$, find the price $$P^*$$ on the demand curve.
5. **Find ATC at $$Q^*$$:**
- Determine $$ATC^*$$ at quantity $$Q^*$$.
6. **Calculate profit or loss:**
- Calculate $$P^* - ATC^*$$.
- If $$P^* > ATC^*$$, the firm makes a profit.
- Total profit is $$ (P^* - ATC^*) \times Q^* $$.
7. **Given area:**
- The shaded area representing profit or loss is given as 1250.
8. **Interpretation:**
- The black point (plus symbol) should be placed at $$(Q^*, P^*)$$.
- The green rectangle (triangle symbols) should shade the area of size 1250 representing profit.
**Final answer:**
- The firm maximizes profit where $$MR = MC$$.
- The price is set from the demand curve at that quantity.
- The profit area is $$1250$$, indicating positive short-run profits.
This profit will induce entry of new firms in the long run, shifting demand and reducing profits to zero.