(Transcript of audio with descriptions. Transcript includes narrator headings and description headings of the visual content)
(Speaker)
This problem is going to analyze the decisions of a restaurant owner that is operating in a monopolistically competitive industry.
The current industry is in long run equilibrium. But the owner observes that her restaurant is not always full ans is wondering of she can increase her profit by lowering her price.
(Description)
The following text is briefly written:
The restaurant business in town is a monopolistically competitive industry in long-run equilibrium. One restaurant owner asks for your advice. She tells you that, each night, not all tables in her restaurant are full. She also tells you that she would attract more customers if she lowered the prices on her menu and that doing so would lower her average total cost. Should she lower her prices?
(Speaker)
It is important to note that the industry is current in long run equilibrium.
(Description)
The coordinate plane with the horizontal x-axis and the vertical y-axis is drawn. The horizontal axis is labeled as Quantity. The vertical axis is labeled as Price, cost, marginal revenue.
Point, Q subscript MC, is labeled on the x-axis. Point, P subscript MC equals ATC subscript MC, is labeled on the y-axis.
Two straight lines are drawn. Both lines decrease linearly so that their slope is negative.
The first line labeled as, MR subscript MC, is above the the second line labeled as, D subscript MC.
There are 2 dotted lines drawn from points, Q subscript MC, on the horizontal axis, and from point, P subscript MC equals ATC subscript MC, on the vertical axis. The first dotted line is parallel to the vertical axis, the second dotted line is parallel to the horizontal axis. These lines intersect at a right angle at point with coordinates, Q subscript MC, and, P subscript MC equals ATC subscript MC.
Two convex curves are drawn. The first curve labeled as MC, intersects the line, MR subscript MC, the line, D subscript MC, and the second curve.
The second curve labeled as ATC intersects curve, MC, and touches the line, D subscript MC, at point with coordinates, Q subscript MC, and, P subscript MC equals ATC subscript MC.
The following text is written above the diagram:
Start with a diagram for a monopolistically competitive firm in long-run equilibrium.
(Speaker)
This means that the price is being set where it equals average total cost. We can see this highlighted in the graph.
(Description)
Point with coordinates, Q subscript MC, and, P subscript MC equals ATC subscript MC is briefly labeled as In long-run equilibrium, a monopolistically competitive firm fill have price equal to ATC. Profit will be zero.
(Speaker)
This graph shows a monopolistically competitive industry in long-run equilibrium. She should not lower her price. Since the industry is long-run equilibrium, each restaurant make zero profit. The restaurant owner is producing at the point where marginal revenue and marginal costs are equal.
Further, the price is equal to average total cost. So she makes zero profit. If she were to lower the price, she would attract more customers. But any increase in quantity beyond the point where marginal revenue and marginal costs are equal will result in greater losses.
We can see this in the figure where any quantity to the right, to QMC, has demand and, thus, price below the average total cost.
(Description)
The section of the MC curve to the right of the point, Q subscript MC, is labeled as Any reduction in price will cause the restaurant to lose money. Price will be below the average total cost.