Chapter 67, Problem 1FRQ

To determine

A correctly labeled graph for monopolistically competitive firm that is experiencing a short-term loss and shade the area that indicates the firm’s loss.

Explanation of Solution

For monopolistically competitive firm that is experiencing a short-term loss, the graph would indicate the firm’s loss as:

  

In the graph, for monopolistically competitive firm in the short-run, on the vertical axis price, cost, and marginal revenue is shown and quantity is represented on the horizontal axis.

The demand curve is sloping downward which means, quantity is increasing with the decrease in cost but the marginal revenue curve also slopes downward, which is below the demand curve and it shows there is a decrease in marginal revenue with the increase in quantity.

The loss-minimizing quantity is at a point Q_U where marginal cost and marginal revenue are equal (MR = MC). The loss-minimizing price is above the demand curve where MC and MR are equal and this point is labeled as P_U.

In addition, the average total cost (ATC) curve is U-shaped, which is above the demand curve at different levels of quantity. The shaded area on the graph represents the area loss, which is below the ATC.

Economics Concept Introduction

Introduction: Monopolistic competition refers to an imperfect competition where multiple manufacturers compete with one another yet sell distinct products that are not exact substitutes.