Suppose a firm in monopolistic competition has the following demandschedule. Sup

Question

Suppose a firm in monopolistic competition has the following demandschedule. Suppose the marginal cost is a constant $70. How muchwill the firm produce? Is this a long-or short-run situation? Ifthe firm is earning above-normal profit, what will happen to thisdemand schedule?

Price         Quantity            Price            Quantity
$100            1                     $70                  5
$95              2                     $55                  6
$88              3                     $40                  7
$80              4                     $22                  8

Explanation / Answer

The firm will supply until the marginal revenue equals marginalcost. When producing 2, the firm has 190 in revenue. producing one morewill increase revenue with 74 to 264. So at least 3 unitswill be produced. Producing another unit will increaserevenue to 320, so with 56. Therefore, it would not be wise for thefirm to produce more than 3 units. In the long run, the above normal profits in this industry willattract new entrants, increasing supply and forcing the price down.Nothing, however, will happen to the demand curve.

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