ONLY COMPLETE ANSWERS WITH COMPLETE DISCRIPTIONS WILL GET THE POINTS. (ManklwCha
ID: 1187521 • Letter: O
Question
ONLY COMPLETE ANSWERS WITH COMPLETE DISCRIPTIONS WILL GET THE POINTS.
(ManklwChapter 16, Problems and Applications #7) Consider a monopolistieally competitive market with N firms. Each firm's business opportunities arc described by the following equations: Demand: Q = 100/N - P Marginal Revenue: MR = 100/N - 2Q Total Cost: TC = 50 + Q: Marginal Cost: MC = 2Q How does N, the number of firms in the market, affect each firm's demand curve? Why? How many units does cach firm produce? (The answers to this and the next two questions depend on N.) What price does each firm charge? How much profit docs each firm make? In the long run, how namy firms will exist in this market?Explanation / Answer
Q = 100/N - P
N is inversely related to the quanity i.e as the no. of firms increases, the demand curve for a single firm shifts leftwards as the quantity demanded from a single firm decreases.
MR=MC for profit maximization
100/N - 2Q = 2Q
4Q = 100/N
Q = 25/N
P = 100/N-Q
P = 100/N-25/N
P = 75/N
Total Revenue = P*Q = 75*25/N^2
Total Cost = 50 + Q^2
Profit = Total Revenue - Total Cost
= 1875/Q^2 - (50 + 25*25/N^2)
= 1875/N^2 - 625/N^2 -50
= 1250/N^2 - 50
In the long run, (1) (P > MC), (2) (MR = MC), (3) (P = AR > MR), (P = AR = ATC), (5) (ATC > MC), and (6) (LRAC > LRMC)
Long run equilibrium profit = 0
Profit = 0
1250/N^2 = 50
N^2 = 25
N = 5
P = ATC
75/N = 50/Q + Q
75/N = 2N + 25/N
50/N = 2N
N^2 = 25
N = 5
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