Jack and Diane own Enviromax, a monopolistically competitive firm that recycles paper products. Their demand, marginal revenue, and cost curves are shown in the diagram below.
Monopolistic Competition Graph[D]
1.If Enviromax wants to maximize profit, what price would they charge?
2.What is their profit per unit if they are operating at the profit maximizing output?
3.Assume now that the demand for recycled paper increases and that the company is earning short-run economic profits. Relative to this short-run situation, explain what happens to profits in the long run and why?
4.In the long run, will Enviromax produce the allocatively or productively efficient level of output? Explain.
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