1. Assume that the short run cost and demand data given in the table below confr
ID: 1235179 • Letter: 1
Question
1. Assume that the short run cost and demand data given in the table below confront a monopolistic competitor selling a given product and engaged in a given amount of product promotion. Compute the marginal cost and marginal revenue of each unit of output and enter these figures in the table.(2 points)
Total Marginal Quantity Marginal
Output cost cost demanded Price revenue
0 $ 25 0 $60
1 40 $_____ 1 55 $_____
2 45 _____ 2 50 _____
3 55 _____ 3 45 _____
4 70 _____ 4 40 _____
5 90 _____ 5 35 _____
6 115 _____ 6 30 _____
7 145 _____ 7 25 _____
8 180 _____ 8 20 _____
9 220 _____ 9 15 _____
10 265 _____ 10 10 _____
(a) At what output level and at what price will the firm produce in the short run? What will be the total profit? (2 points)
(b) What will happen to demand, price, and profit in the long run?
(2 points)
Explanation / Answer
The first table is cost. The second table is demand or quantity. Marginal Cost (MC) of (0) is : 25/60 = 0.416 MC of (1) is : 40/55 = 0.7272 MC of (2) is : 45/50 = 0.9 MC of (3) is : 55/45 = 1.222 MC of (4) is : 70/40 = 1.75 MC of (5) is : 90/35 = 2.571 MC of (6) is : 115/30 = 3.8333 MC of (7) is : 145/25 = 5.8 MC of (8) is : 180/20 = 9 MC of (9) is : 220/15 = 14.666 MC of (10) is : 265/10 = 26.5 a) At level 6 the firm will produce and the total cost is fixed cost + variable cost = 115 b) Demand will gradually increase, price may increase and profit will increase but in a decreasing way.
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