Correct MC illustration

One of our finest J1 student whom get the Monopoly Competition “MC” illustration correct – in the short run, the MC firm is making a loss at its profit maximizing point where Marginal Cost “MC” = Marginal Revenue “MR”. At MC = MR, the Average Cost “AC” > Average Revenue “AR”.

But in the long run, MC firm will be breaking even because of low barriers to entry – other loss making firms will exit the market, causing lesser available substitutes (steeper AR) and larger market share (outward shift in AR). The firm will break even at the new profit maximizing output will at Q2. How to spot? At Q2, look vertically upwards and you will see AC (no shift) is seating nicely at AR (shifted), where AC = AR.

Excellent and well done!!!

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