(a) (i) Monopolistic competition is similar to perfect competition in that there are many firms in the market, and each firm faces a downward-sloping demand curve. In the long run, firms in monopolistic competition earn zero economic profit, while in perfect competition firms earn zero economic profit in both the short and long run. (ii) Monopolistic competition is similar to monopoly in that each firm has some degree of market power, which allows it to set its own price. However, in monopolistic competition, firms face competition from other firms selling similar but not identical products, so they cannot charge a price that is too high without losing customers.
(b) In the short run, WataDine will produce the quantity where marginal revenue (MR) equals marginal cost (MC), which is labeled QM in the graph. The price that WataDine can charge for this quantity is labeled PM.
(c) In the long run, WataDine's economic profit will be zero, because new firms will enter the market and existing firms will expand, which will increase competition and decrease demand for WataDine's meals. As demand decreases, WataDine's demand curve will shift to the left, which will decrease the price it can charge for its meals.
(d) (i) If WataDine is taking advantage of economies of scale, it is producing at a lower average total cost than it would if it were producing at a smaller scale. In the long run, other firms will enter the market and compete with WataDine, which will decrease demand for WataDine's meals and make it more difficult for WataDine to take advantage of economies of scale. (ii) WataDine will not produce the productively efficient output because it is producing at a quantity where marginal revenue equals marginal cost, which is less than the quantity where marginal cost equals average total cost.