Introduction to Microeconomics Fall 2017 Monopolistic Competition Upload complet

Question

Introduction to Microeconomics Fall 2017 Monopolistic Competition Upload completed assignment by Sunday, November 9 This figure below shows a monopolistically competitive firm in the short run. Use the figure to answer the following questions: 1. Illustrate the firm's profit-maximizing price and quantity on the graph. What is the profit-maximizing price and quantity for the firm? 2. How much profit does that firm make at that price and quantity? s. What should happen in the long run? 4. Illustrate the long-run situation of the firm using the graph. 60 MC ATC 50 40 d-P 30 20 H 10 MR 100200 300 400 500 600 700 800 Output

Explanation / Answer

1) At first let us consider the firm will be in equilibrium where MR= MC to maximise ptofit.Let AR and MR curves of the firm and MC is the marginal cost curve of the firm. The equilibrium output level is 700 units and the equilibrium price is 45.

2)The firm maximises total profits. But under group equilibrium the equality of MR and MC is not the sufficient condition. Industry equilibrium is possible when each firm is earning only normal profits i.e when AR=AC for each firm.

3 )In the long run if the existing firms earn more than normal profits new firms will enter into the industry. This will reduce the volume of abnormal profits of the existing firms. Entry will continue until all firms earn only normal profits.

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