Firm produces wooden train engines in a monopolistically competitive market. The following graph shows its demand curve, marginal revenue (MR) curve, marginal cost (MC) curve, and average total cost (ATC) curve.
Consider a scenario where a business manufactures wooden railway engines in a market with intense competition. The demand curve, marginal revenue (MR) curve, marginal cost (MC) curve, and average total cost (ATC) curve are all displayed in the graph below. On the graph, add a black point (plus sign) to represent the firm's long-term monopolistically competitive equilibrium pricing and quantity. Place a grey point (star symbol) after it to denote the minimum average total cost the company must bear as well as the corresponding amount. The fact that P = ATC at the optimal quantity for each business indicates that this market, which is monopolistically competitive, is in long-run equilibrium. Additionally, in long-run equilibrium, the average total cost of a monopolistically competitive company equilibrium is greater than the minimum average total cost. Because there are either too many or too few businesses in the market, monopolistic competition may also be socially inefficient. The existence of the product variety externality suggests that there aren't enough new businesses entering the market.
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