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The market structure for Red Gear is best characterized by monopolistic competition. Red Gear is one of the producers in this market. The demand for Red Gear is Q = 50 - P. The company's total cost function is given by C (Q) = (1/8) Q2 + 555.56.
a. Determine the profit maximizing level of output and price. Is this long run equilibrium? According to the theory of monopolistic competition, do you expect entry or exit taking place in this industry? Explain. The demand for Red Gear is Q = 50 - P.
b. Illustrate the results in part (a) in an appropriate diagram. Make sure to properly label your diagram.
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