5. Draw a short run equilibrium for a monopolistically competitive producer, making sure you have the relevant curves in your graph (Demand, Marginal Revenue and Marginal Cost). Mark the quantity produced and the corresponding price charged. Now assume the demand the producer faces shifts, becoming less elastic. Draw a new equilibrium so that it is characterized by the same quantity produced as before, but a higher price. (a) What does this say about the supply curve of a monopolistically competitive producer (more generally, any producer with pricing power)? More specifically, is there even a concept of supply curve in this case? Briefly explain, reviewing the basic definition of supply curve we encountered in the first week. (b) Briefly explain why it makes intuitive sense that, with this change in demand (and costs unchanged), the producer's markup (i.e. the difference between the price p and marginal cost MC) is now higher.
5. Draw a short run equilibrium for a monopolistically competitive producer, making sure you have the relevant curves in your graph (Demand, Marginal Revenue and Marginal Cost). Mark the quantity produced and the corresponding price charged. Now assume the demand the producer faces shifts, becoming less elastic. Draw a new equilibrium so that it is characterized by the same quantity produced as before, but a higher price. (a) What does this say about the supply curve of a monopolistically competitive producer (more generally, any producer with pricing power)? More specifically, is there even a concept of supply curve in this case? Briefly explain, reviewing the basic definition of supply curve we encountered in the first week. (b) Briefly explain why it makes intuitive sense that, with this change in demand (and costs unchanged), the producer's markup (i.e. the difference between the price p and marginal cost MC) is now higher.
Chapter1: Making Economics Decisions
Section: Chapter Questions
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