1. This figure depicts a situation in a monopolistically competitive market. 105
ID: 1126306 • Letter: 1
Question
1. This figure depicts a situation in a monopolistically competitive market. 105 100 95 MC ATC 75 70-- 65 50 35 30 15 10 Demand 5 10 15 20 25 30 33 40 45 50 35 60 65 70 75 80 83 90 95 100105110113120 e What is the profit-maximizing price, quantity, and resulting profit? At the profit-maximizing level of output, what is this firm's total cost of production? How much consumer surplus will be derived from the purchase of this product at the monopolistically competitive price? Is the firm operating in the short run or in the long run? Why? What happens in the long run (entry or exit of firms in/from the industry)? a. b. c. d. e.Explanation / Answer
a) In the short-run, MC = MR and extended to the demand curve.
Short-run profit-maximizing price is $80, quantity is 20, and profit is (P-ATC) x Q = ($80-$70) x 20 = $200.
b)Total cost is $70 x 20 = $1400.
c) Area of consumer surplus= Area of triangle = 1/2 x base x height
= 1/2 (100-80) (20-0)
= 1/2 (20)(20) = 1/2 x 400= $200
d) Short run as MR= MC and the firm enjoys economic profit as ATC is not at the lowest point.
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