A monopolistically competitive firm faces the following demand curve for its pro

Question

A monopolistically competitive firm faces the following demand curve for its product:

Price ($) 10 9 8 7 6 5 4 3 2 1

Quantity 2 4 6 9 10 12 14 16 18 20 22.

The firm has total fixed costs of $20 and a constant marginal cost of $5 per unit. The firm will

a. produce two units; firms will exit the market in the long run.

b. produce four units; firms will exit the market in the long run.

c. produce six units; firms will exit the market in the long run.

d. produce eight units; firms will enter the market in the long run.

e. produce twelve units; firms will enter the market in the long run.

I know the anser is c) but I don't understand how to get it

Explanation / Answer

A monopolistically competitive firm will produce till MR>MC, i.e: the additional revenue generated by producing the successive unit is more than the cost incurred in producing. In this question, we first calculate the MR.

Given are, MC=5, TFC= 20

Formulas to be used : Price is same as Average revenue.

P * Q = TR,TRn - TRn-1= MR, TVC= MCn+MCn+1, TC= TVC+TFC

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From the table above, at Q=6, MR>MC. Beyond this level of output , the cost incurred in producing a unit is more than the revenue generated.

Hence, the firm will produce till 6 units and exit in the long run as it will not be profitable to produce.

P Q FC MC TVC TC TR= P*Q MR= TRn- TRn-1 10 2 20 5 5 25 20 - 9 4 20 5 10 30 36 16 8 6 20 5 15 35 48 12 7 8 20 5 20 40 56 8 6 10 20 5 25 45 60 4 5 12 20 5 30 50 60 0 4 14 20 5 35 55 56 -4 3 16 20 5 40 60 48 -8 2 18 20 5 45 65 36 -12 1 20 20 5 50 70 20

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