A firm in monopolistic competition faces, in the long run, a demand with price e

Question

A firm in monopolistic competition faces, in the long run, a demand with price elasticity of -2 (eta_x,p = -2) and a cost function of: C(x) = 400 + 4 middot x. Long-run equilibrium is where: p = 8; x = 200 and profits are above normal; p = 4; x = 100 and profits are normal; p = 8; x = 100 and profits are normal; p = 8; x = 100 and profits are above normal. In a market where two firms interact strategically, the total demand they face is given by: p(x) = 1,000 - 3 middot x The cost of production is given by: C(x) = 100 middot x Deadweight loss will be 20,000; Deadweight loss will be 10,000; Deadweight loss will be 5,000; Deadweight loss will be 15,000. In a world of two goods (x and y) technological improvements in the production of x will lead to: A fall in the relative price of x (a decrease in p_x/p_y) but not necessarily an expansion of the x industry; A fall in the relative price of x with a necessary expansion of the x industry; An increase in the relative price of x with a necessary expansion of the x industry; An increase in the relative price of x but not necessarily an expansion in the x industry. The contract curve is the collection of points where: Offer curves (Price-Consumption Curves) are tangent to each other; Indifference curves are tangent to each other; Offer curves are tangent to indifference curves; Indifference curves intersect offer curves.

Explanation / Answer

QUESTION - 1

Lerner Index (LI) = - 1 / Price elasticity of demand = - 1 / - 2 = 1 / 2

Again, Lerner Index = (Price - Marginal cost) / Price

Total cost, C(x) = 400 + 4x

Marginal cost, MC = dC(x) / dx = 4

Therefore,

LI = (P - 4) / P = 1 / 2

2 x (P - 4) = P

2P - 8 = P

P = 8

In the long run, Average cost (AC) = Price

AC = C(x) / x = (400 / x) + 4

So,

(400 / x) + 4 = 8

400 / x = 4

4x = 400

x = 100

When x = 100, C(x) = 400 + (4 x 100) = 400 + 400 = 800

Revenue = P.x = 8 x 100 = 800

Profit = Revenue - Cost = 800 - 800 = 0

Therefore, excess (economic) profit is zero & firm is earning only normal profit.

Correct option (c).

NOTE: First question is answered.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.