ECONOMICS: Principles and Applications 3e HALL & LIEBERMAN © 2005 Thomson Business and Professional Publishing Monopolistic Competition and Oligopoly

Figure 1 A Monopolistically Competitive Firm in the Short Run MR 1 $ d1d1 A MC ATC Dollars Homes Serviced per Month 2.and charges $70 per home. 4.Kafka's monthly profit–$10,000–is the area of the shaded rectangle. 1.Kafka services 250 homes per month, where MC and MR intersect... 3.ATC at 250 units is less than price, so profit per unit is positive.

Figure 2 A Monopolistically Competitive Firm in the Long Run d2d2 MR 2 E MC $ Dollars Homes Serviced per Month ATC MR 1 In the long run, profit attracts entry, which shifts the firm's demand curve leftward. The typical firm produces where its new MR crosses MC. d1d1 Entry continues until P = ATC at the best output level, and economic profit is zero.

Figure 3 The Prisoner’s Dilemma

Figure 4 A Duopoly Game

Figure 5 Advertising in Monopolistic Competition 1,000 C A $120 2,000 6,000 B 1.Before advertising, long-run economic profit is zero. 2.In the short run, the first firms to advertise earn economic profit. d ads d no ads ATC ads ATC no ads d all advertise Dollars Bottles of Perfume per Month 3.But in the long run, imitation and entry bring economic profit back to zero. 4.Advertising can lead to a higher price in the long run, as in this panel... (a)

Figure 5 Advertising in Monopolistic Competition Dollars Bottles of Perfume per Month 1,000 A 60 d all advertise d no ads B $120 6,000 C 50 2,000 d ads ATC ads ATC no ads 5.or to a lower price in the long run, as in this panel. (b)

Figure 6 An Advertising Game

Table 1 A Summary of Market Structures