PS #7 - Part II-A - 14.1 Consider a monopolistically competitive market with N f

Question

PS #7 - Part II-A - 14.1

Consider a monopolistically competitive market with N firms. Each firm's business opportunities are described by the following equations:

Demand: Q^D = (100 / N) - P
Marginal Revenue: MR = (100 / N) - 2*Q
Total Cost: TC = 50 + Q^2
Marginal Cost: MC = 2*Q

Answer the questions that follow. More detailed background about these questions can be found in the non-online version of this problem set, which is posted on MindTap just below the online version. We strongly suggest you access that document before answering these questions.

(a) Provide an expression for this firm's Average Variable Cost (AVC). Is AVC U-shaped here? Why or why not? Explain with reference both to marginal cost and to marginal product.

Explanation / Answer

Ans: AVC = Q

Explanation:

TC = 50 + Q2

In the TC function, TFC = 50 and TVC = Q2

AVC = TVC / Q

        = Q2 / Q

        = Q

No, here, AVC is not U-shaped. Here, it is upward sloping. Because as output increases, AVC will increase (Since AVC and output(Q) are same).

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