Consider the following graph of a monopolistically competitive firm selling DVDs

Question

Consider the following graph of a monopolistically competitive firm selling DVDs. a. How many DVDs should be sold to rent per day to maximize profit? Briefly explain your answer. b. What is the economic profit for this firm operating where economic profit is maximized? c. Will this firm likely continue operating in the long run? Briefly explain your answer. d. Explain the impact on this firm of other firms leaving the market. Would this action alter your decision made in part C? Submission Requirements: Attach a Word document of 150 to 250 words that contains all answers. Format: Double line space, Times New Roman, 12-point font Formulas and calculations must be shown along with the final correct answer.

Explanation / Answer

(A)

Condition for maximizing profit(generally where equilibrium exists) is as follows:
E=MR=MC=P
So,this point in the graph exists where MR equals MC and this is the point where they meet and that point on x-axis is 55 DVDs per day(Quantity) and on y-axis it is $1.75(Price & cost).
So to maximize profit 55 DVDs be sold to rent per day to maximize profit.


(B)

Economic profit for this can be calculated by following way:

The point on which profit has been maximized as stated in part(A) is 55 DVDs and cost/DVD at this is

$1.75 so profit will be:

55 * $1.75= $96.25



(C)

Yes,this firm is likely to continue operating in the long run in similar fashion.Considering above graph,it seems that as AVC are increasing and might that in the long run firm couldn't operate in profit but this is untrue because it is a well known fact that AVC render into FC(fixed costs) so this firm can carry on with profit.



(D)

Other firms leaving the market would profit this firm because the demand of DVDs will shift towards this firm and this very firm will have to fulfill the needs of customers.It is well depicted by Demand Curve.This decision is not altering the decision made in (C).

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