question archive Consider the price and cost information in the table below to answer the following questions about a monopolistically competitive firm
Consider the price and cost information in the table below to answer the following questions about a monopolistically competitive firm
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Consider the price and cost information in the table below to answer the following questions about a monopolistically competitive firm.
(a.) How many units will this firm produce?
(b.) What is the firm's profit?
(c.) Will this firm's profits likely increase, decrease, or stay the same in the long run? Explain briefly.
| Quantity | Price ($) | Total Cost ($) |
| 0 | 0 | 50 |
| 1 | 60 | 60 |
| 2 | 40 | 70 |
| 3 | 30 | 80 |
| 4 | 20 | 90 |
| 5 | 10 | 100 |
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(a.) The firm will produce 3 units. The table below extends the earlier table on quantity (Q), price (P) and total cost (TC), by using those data to derive data for total revenue (TR), marginal revenue (MR), marginal cost (MC), profit and average total cost (ATC).
| Q | P ($) | TC ($) | TR ($) | MR ($) | MC ($) | Profit ($) | ATC ($) |
| 0 | 0 | 50 | 0 | -50 | |||
| 1 | 60 | 60 | 60 | 60 | 10 | 0 | 60.00 |
| 2 | 40 | 70 | 80 | 20 | 10 | 10 | 35.00 |
| 3 | 30 | 80 | 90 | 10 | 10 | 10 | 26.70 |
| 4 | 20 | 90 | 80 | -10 | 10 | -10 | 22.50 |
| 5 | 10 | 100 | 50 | -30 | 10 | -50 | 20.00 |
The formulas used to derive the additional variables are as follows:
- TR = (P)(Q)
- MR = Tri - TR(i - 1), where i refers to the output level
- MC = TCi - TC(i - 1), i not equal to 0
- profit = TR - TC
- ATC = TC/Q.
A monopolistic competitor will maximize profits where marginal revenue = marginal cost, MR = MC. The table shows that this occurs when both MC and MR are $10 and Q is 3 units.
(b.) From the profit column, it can be seen that the firm's profit is $10 at that level of output (3 units).
(c.) This firm's profits will likely decrease marginally in the long-run. At the long-run equilibrium point, a monopolistic competitor's price will equal average total cost (ATC). Short-term monopoly profits will eventually erode to zero over time. This happens as the market advantage it had, such as from a patent or a unique production or marketing approach, is eliminated by competing firms developing products and processes that are close substitutes. The firm's demand curve will be tangent to the ATC curve at the point of equality between P and ATC. It can be seen from the P and ATC columns in the table that, for this firm, P and ATC differ slightly at $30 and $26.70 respectively. So, it is likely that there will be further adjustment through the entry of competing products.
