NAME PRINT LAST NAME, FIRST NAME SECTION MONOPOLISTIC COMPETITION tically Profit
ID: 2440391 • Letter: N
Question
NAME PRINT LAST NAME, FIRST NAME SECTION MONOPOLISTIC COMPETITION tically Profit-maximizing firms in monopolistically competitive markets charge a price that is equal to marginal cost a. always b. c. always charge sell products that are very similar to each other tend to earn positive price that is equal to average total cost ive economic profit in the long run. 2. For monopolistically competisive firms in long-run equilbrium, economic profit s a. positive because their products are unique b. positive because their products are differentiated c. zero because there are no barriers to entry d. zero because of strong barriers to entry 3. If a monopolistically competitive firm is prodacing where marin evis eqgal to marginal cost but price is greater than marginal cost, the firm a. should decrease output to increase profia. b. should increase output to increase profit. e should continue to produce at this point because it is already maximizing profit d. could increase profit by either increasing or decreasing output. In the long run, it is true that monopolistically competitive firms produce where: a. P> MC and P>minimam average cos b, P>MC and P#minimum average cost 4. c. PExplanation / Answer
1. In monopolistic competition, firms produce differentiated products. Differentiated products means that firms use some means in order to make the consumer perceive that their product is superior to other similar products. In other words, firms producing similar products use some factor to distinguish their own good from other goods. Therefore the key thing to take here is firms sell very similar products. Hence the answer is c.
Note: The optimal condition for setting price is when Marginal revenue = marginal cost. Hence when MR = MC, then quantity is decided and the corresponding price is calculated from the demand curve. Therefore both a and b are wrong. Also in long run, economic profits are zero because there are no barriers to entry so new firms enter the market and drive down the price. And hence profits go to zero.
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2. For monopolistically competitive firms in long run, economic profits is zero as because there are no barriers to entry. Hence answer is c. This is because in short term, firms earn positive profits by setting MC = MR. Hence price is high and quantity is optimised. However in long run, other firms observe this proft and enter the market. Quantity sold in the market increases as a result and prices are driven don. This affects the profit and ultimately, economic profits goes to zero. At this stage Price = marginal cost.
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3. If monopolistically competitve firm is producing at MC = MR or marginal revenue = marginal cost condition, it should continue producing at this stage despite price being higher than Price = MC condition. Therefore answer is c. This is because the firm optimises it's profits. And the optimum conditon occurs at MC = MR condition. Here profits are maximum.
P = MC condition happens when market becomes competitive and prices decrease. Therefore since a monopolistic compettive firm wants to maximise their profuts (in short run at least), they do so by setting marginal revenue = marginal cost.
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4. In long run it is true that monopolistically compettive firm produce where P = MC and P = average minimum cost. Therefore answer is d.
We have seen above that firms in long run produce at P = MC condition. This is because entry of new firms which make the market competitive and reduce prices. Firms end up earning zero economic profits as result. They also don't want be be in a loss.
Therefore, competitive market allows them to produce just enough where they don't have profits and neither suffer any loss. This is only possible at minimum of average cost. Therefore if price > min average cost, firms earn postive profit (as Price * quantity > total cost) which is not possible in long run. An if P < min AC, then they suffer a loss and it is better to shut down.
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5. Monopolistically competitve firm try to maximise their profits in short run. Therefore they produce till their marginal profits = marginal cost. That is extra profit from producing one more unit of good equals extra cost from producing one more unit of good.
Therefore correct answer is c.
Note: As we have seen in above questions, P = ATC in long run as economic profits is zero. Therefore both a and b are wrong which makes d wrong too.
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6. Monopolistically competitve firms either earn profit or loss in short run but tend to earn zero economic profits in long run. Therefore correct answer is b.
This is because in short run firms try to maximise thier profits. We have seen that this happens when marginal cost = marginal revenue. However demand can be very low and they might also earn losses in short term. They can continue to priduce till their variable costs are covered. However if their situation doesn't improve in log run, they could shut down and earn zero profits. Or if it improves, but till due to entry of firms, prices will be low. Hence in any case economic profits will be zero in long run.
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6. If the firms sells price discriminates, this means that it sells its products to different people at different prices. It knows the demand of each person and sells them the product at their highest prices. This maximises the firm's profits.
Therefore according to the data it is selling 3 products. Therefore it will sell the first product to the person willing to pay maximum for it. That is it will sell the first unit of good to a person offering him price 700. Then it will sell the second good to the person offering him the second highest price. That is , sell the 2nd unit at $600. Similarly it will sell the third unit at $500. This will earn the firm $700 from the first good,, $600 from selling the second and $500 from the third. Therefore toal revenue =
700 + 600+ 500 = $1800.
Therefore correct answer is d.
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7. If the firm cannot price discriminate, that is it cannot tell the individual willingess to pay of each person, the firm has no choice but to sell the good at the same price to all his customers.
From the demand schedule we see that at price $500, 3 units of good is demanded. Therefore the firm sells 3 units at $500 each.
And hence revenue = Price * quantity =
= 3 * 500 = $1500. T
Therefore firm earns a revenue of $1500 and correct answer is c.
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8. If a firm price discrimiates, it will sell the first unit to the person offering the highest price = 40 dollars. Then he will sell the second unit to person offering the second highest price = 30 dollars. Similarly third unit to third highest at $20 and fourth to fouth highest at $10.
Therefore it will earn 40 dollars from selling first unit, 30 from second, 20 from third and 10 from selling the fourth unit. So total earning =
40 + 30 + 20 + 10 = $100
If firm is unable to price discriminate, it will sell all it's four units at the same price. From the demand schedule we see at four units are demanded at price $10. Therefore total revenue = price * quantity =
= 10*4 = $40
Therefore it earns a reveue of $40 dollars when it is unable to price discrimiate.
Hence correct answer is d.
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9. Marignal Revenue is the extra revenue the firm earns when it sells one more unit of good. Therefore marginal revenue from selling the third unit will be interpreted as the extra revenue the firm gets when it sells the third unit after the second unit.
==> Total revenue from selling third unit - total revenue from selling the second unit of good
When the firm cannot price discriminate, it will sell all its units at the same price.
Therefore it will sell 2 units at price $30 eachh. Revenue in this case =
Price * quantity = $30 * 2 = $60
It will sell 3 units at price $20 each. Therefore revenue in this case =
Price * quantity = $20 * 3 = $60
Hence marginal revenue = $60 - $60 = 0 that is it gets no extra revenue from selling the third unit.
Similarly, when it sells 4 units, it will sell it at a price of $20 each. Therefore total revenue in this case = price * quantity = $10 * 4 = $40
Therefore marginal revnue from selling the fourth unit = total revenue by selling 4 units - toal revenue by selling 3 units of good =
==> $40 - $60 = -20 dollars.
Therefore correct answer is d.
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10. If the monopolist is able to price discriminate, it will sell the first unit to the person offering the highest price, second unit to person offering the second highest price, third to third highest price and fourth to fourth hihest price.
Hence it wil earn $40 from selling the first unit, $30 from selling the second, $20 tby selling the third and $10 by selling the fourth.
Hence Total profits by selling 3 units = $40 + $30 = $70
Total profits by selling 3 units = $40 + $30 + $20 = $90
Total profits by selling 4 units = $40 + $30 + $20 + $10= $100
Therefore marginal revenue by selling the third unit = Total revnue by selling 3 units - Total revnue by selling 2 units = $90 - $70 = $20
Marginal revenue by selling the third unit = Total revnue by selling 4 units - Total revnue by selling 3 units = $100 - $90 = $10
Therefore the correct answer is b.
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