The table above shows the demand and cost data facing a monopolistically competi

Question

The table above shows the demand and cost data facing a monopolistically competitive producer of canvas bags. a. What are the firm's profit-maximizing or loss-minimizing price and quantity? b. At the profit-maximizing or loss-minimizing output level, what are this firm's profits (or losses)? c. Calculate marginal revenue for this firm if it drops its price from $10 to $8 and increases production from 5 to 6 units. Would you rather be the owner of a firm earning zero accounting profits or zero economic profits? Why?

Explanation / Answer

Working notes:

(1) Total revenue (TR) = Price (P) x Quantity (Q)

(2) Marginal revenue (MR) = Change in TR / Change in Q

(3) Marginal cost (MC) = Change in TC / Change in Q

(a) A monopolistic competitor maximizes profits (minimizes losses) by equating MR with MC. In above table, MR = MC (= $6) when Q = 4 and P = $12.

(b) Firm profit = TR - TC = $(48 - 32) = $16

(c) As per above table, required MR = - $2.

Note: First question (Q2) is answered in full.

P Q TR MR TC MC ($) ($) ($) ($) ($) 18 1 18 14 16 2 32 14 20 6 14 3 42 10 26 6 12 4 48 6 32 6 10 5 50 2 38 6 8 6 48 -2 44 6

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