product, a decrease in the firm’s profit-maximizing price and a decrease in the firm’s profit-maximizing

level of output, essentially unwinding the process described in the answer to question 1. In the long-run

equilibrium, all firms in monopolistically competitive markets will earn zero economic profits.

3. a.

If the firms form a cartel, they will act like a monopoly, choosing the quantity of output where MR =

MC. Drawing a line from the monopoly quantity up to the demand curve shows the monopoly price.

Assuming that fixed costs are zero, and with an understanding of cost and profit, we can infer that

when the marginal cost curve is horizontal, average cost is the same as marginal cost. Thus, the cartel

will earn positive economic profits equal to the area of the rectangle, with a base equal to the

monopoly quantity and a height equal to the difference between price (on the demand above the

monopoly quantity) and average cost, as shown in the following figure.
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