The firm is operating under monopolistic competition.
The firm represented in the diagram is selling under conditions of monopolistic competition.
Here's why:
- The firm has a downward-sloping marginal revenue (MR) curve:
This indicates that the firm has some control over the price it charges, unlike in perfect competition where the MR curve is horizontal.
This suggests that the firm is selling a differentiated product, and consumers perceive it as somewhat different from the offerings of its competitors.
- The firm's average total cost (ATC) curve intersects its MR curve twice:
This means that there are two output levels (Q1 and Q3) where the firm's price (P1 and P3) equals its ATC.
This is characteristic of monopolistic competition, where firms can choose to operate at either a profit-maximizing or loss-minimizing output level.
- The firm's ATC curve eventually intersects its average variable cost (AVC) curve:
This indicates that the firm has some fixed costs in the short run, which is also consistent with monopolistic competition, where firms often have brand-building or marketing expenses.
Therefore, based on the given information, monopolistic competition best describes the market conditions under which the firm is operating.