Let's break down the **step-by-step solution** for each part, with explanations and final answers: --- ## 1. **Graph Point Placement** **Instructions:** - Place a black point (plus symbol) for the long-run monopolistically competitive equilibrium price and quantity. - Place a gray point (star symbol) for the minimum average total cost (ATC) and quantity. ### **Step 1: Identify the Long-Run Monopolistically Competitive Equilibrium** - In the long run, a monopolistically competitive firm produces where **MR = MC** and the **demand curve is tangent to the ATC curve** (not at its minimum!), so the firm earns zero economic profit. - This tangency occurs **to the left of the minimum ATC**. ### **Step 2: Identify the Minimum ATC** - The minimum ATC occurs at the lowest point of the ATC curve, where **MC = ATC**. **Graph Placement:** - **Black Point (Mon Comp Outcome):** Place where the **Demand curve is tangent to the ATC curve**. - **Gray Point (Min Unit Cost):** Place at the **minimum of the ATC curve** (where MC = ATC). --- ## 2. **Excess Capacity Statement** **Statement:** *"This indicates that there is excess capacity in the market for jackets."* - **True or False?** ### **Explanation:** - In monopolistic competition, firms do **not** produce at the lowest point on the ATC curve; they produce at a **lower quantity**, where demand is tangent to ATC. - This means firms could produce more at a lower average cost, but don't due to downward-sloping demand. - **This is called "excess capacity."** ### **Answer:** **True.** **Reason:** Firms in monopolistic competition produce less than the efficient scale (minimum ATC), so there is excess capacity. --- ## 3. **Social Inefficiency in Monopolistic Competition** **Statement:** "Monopolistically competitive markets may be socially inefficient due to the presence of too many or too few firms. The presence of the ________ externality implies that there is too much entry of new firms in the market." ### **Explanation:** - The **"business stealing" externality** occurs when new firms enter the market and take customers away from existing firms, reducing existing firms' profits and causing entry beyond the socially optimal number of firms. ### **Answer:** - The blank should be filled with **"business stealing"**. --- ## **Summary Table** | Question | Answer | Reasoning | |----------|--------|-----------| | Graph: Mon. Comp. Outcome | Tangency of Demand & ATC (not minimum ATC) | Where firm earns zero profit in the long run | | Graph: Min Unit Cost | Minimum of ATC (where MC = ATC) | Lowest possible ATC, efficient scale | | Excess Capacity | **True** | Firms operate left of min ATC, not at efficient scale | | Social Inefficiency Blank | **business stealing** | Too much entry due to profit erosion | --- ### **Final Answers (to fill in):** 1. **True or False:** True - **Reason if correct:** Firms in monopolistic competition do not produce at minimum ATC, so there is excess capacity. - **Reason if incorrect:** If it were false, it would mean firms are producing at minimum ATC, which is not the case in monopolistic competition. 2. **Blank:** business stealing - **Reason:** The business stealing externality leads to too much entry. Let me know if you need any diagram annotation or further details!

(a) **marginal revenue equals marginal cost** **less than** (b) **True** (c) **business stealing**

(a) **marginal revenue equals marginal cost** **less than** (b) **True** (c) **business stealing**