AP_Krugman_Textbook

module 67 Introduction to Monopolistic Competition 667

Section 12 Market Structures: Imperfect Competition
Tackle the Test: Free-Response Questions

1. Draw a correctly labeled graph for a monopolistically
   competitive firm that is unprofitable in the short run. Shade
   the area that represents the firm’s losses.

Answer (7 points)

1 point:Correctly labeled axes

1 point:Downward-sloping demand curve

1 point:Marginal revenue curve below the demand curve

1 point:Loss-minimizing quantity where MC=MR

1 point:Loss-minimizing price on demand curve above where MC=MR

1 point:U-shaped average total cost curve above the demand curve at every
quantity

1 point:Correct loss area shaded

Loss

DU

MRU

MC

ATC

QU

PU

Quantity

Price,

cost,

marginal

revenue

ATCU

Loss-minimizing quantity

2. Draw a correctly labeled graph for a monopolistically
   competitive firm in long-run equilibrium. Label the distance
   on the quantity axis that represents excess capacity.