(1)Suppose a firm produces and sells its output at $38 per unit, in what market

Question

(1)Suppose a firm produces and sells its output at $38 per unit, in what market is such a firm operating? Provide a brief explanation.

(2)Determine the economic capacity of the firm in part(1) if the firm's total cost function is
TC(Q)=40Q-2Q2 +0.5Q3

(3) For the same firm determine the output that will maximize its profit

(4) How much profit (if any) could this firm earn by producing this profit maximizing output?

(5) What is a monopolistic competitive firm? Given the same resources with a firm in a perfectly competitive industry, how could output and prices (of output) be different for both firms?

Explanation / Answer

5.Monopolistic competition has characteristics of both competition and monopoly. Similar to competition, it has many firms, and free exit and entry. Similar to monopoly, the products are differentiated and each company faces a downward sloping demand curve. Since the company has a differentiated product, it is like a monopolist and faces a negatively-sloped demand curve. In the short-run, marginal revenue is always less than demand profit is maximized where MR = MC profit = (price - average total cost) x quantity The short-run equilibrium in monopolitic competition is the same as for a monopolist, and businesses may make positive, zero, or negative profits in the short run. Long Run Equilibrium In the long run, entry and exit are both possible. If profit is greater than zero, businesses will enter, and each company's market share will fall because of more variety. As a result, each company’s demand curve will decrease, along with price and quantity. If profit is less than zero, businesses will exit, and each company’s market share will increase. This will cause the remaining companies' demand curves to increase, along with the price and quantity. If profit is equal to zero, there will be no entry into or exit from the industry. In the long run, all the companies' economic profits must be zero. Monopolistic Competition and Welfare Let's compare a company in monopolistic competition with a company in perfect competition, where both are in a long-run equilibrium. In both cases, profit equals zero. The two main differences between the two are: Excess Capacity companies in perfect competition produce where ATC is at a minimum (efficient scale) companies in monopolistic competition produce where quantity of output is smaller, and on a downward sloping part of ATC (excess capacity) could increase capacity and lower average costs Make-up Over Marginal Cost for a competitive firm, price = marginal cost for a monopolistic competition firm, price > marginal cost there is a mark-up above MC even though the firm makes zero profits

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