ECO 1304 Chapter Notes - Chapter 10: Monopolistic Competition, Economic Equilibrium, Profit Maximization

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greygrasshopper518

19 Dec 2016

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A monopolistic competition is a market structure with many firms selling differentiated products. Three basic characteristics of monopolistic competition: many sellers, product differentiation and free entry. Short-run profit maximizing output is where mc = mr. a monopolistically competitive firm is making short-run economic profits when the equilibrium price is greater than average total costs at the equilibrium output. Calculate tr (p* x q*): find total cost. At q*, go up to atc, then left to the vertical axis to compute atc per unit. Calculate tc = (atc x q*): determine the amount of profit or loss. If tr > tc then profit, if tr < tc then loss. If there is economic profit, and market entry and exit are sufficiently free: New firms will enter when there are economic profits. New suppliers cut into the demand of the existing firms. Demand will decrease until the average total cost (atc) curve barely touches it and economic profits are reduced to zero.

Related Questions

PROFIT MAXIMIZATION

Reminders:

Q: Quantity, TC: Total Costs, VC: Variable Costs, MC: Marginal Costs, MR: Marginal Revenue, TR: Total Revenue

1. Suppose the market for DVD movies is perfectly competitive. The industry price for the movies is $24, and a typical firm has the following total cost data:

Q	TC	VC	MC	MR	TR	Net Profit
0	10
1	33
2	53
3	70
4	90
5	114
6	143

a. Calculate the TR, MR, and MC for each level of output.

b. What condition must be met for the firm to maximize profits? What is the profit maximizing level of output and price for this firm? How much profit would be made?

2. Now suppose that some firms have been able to differentiate their DVDs, and the market has become monopolistically competitive. A typical firm now has the following demand schedule and total cost data:

Q	P	TC	VC	MC	MR	TR	Net Profit
0	40	8
1	35	20
2	30	28
3	25	40
4	20	56
5	15	76
6	10	100

a. Calculate the TR, MR, and MC for each level of output.

b. What condition must be met for the firm to maximize profits? What is the profit maximizing level of output and price for this firm? How much profit would be made?

Answer the following Questions for a Monopoly Firm.

Price	Quantity	TR	MR	MC	TC	Profit
$400	0				$2,000
390	1			$200
380	2				2,360
370	3				2,500
360	4
350	5				2,720
340	6
330	7				3,060
320	8			$250
310	9				3,630
300	10			$400
290	11			$500

a) Fill in the missing information above for this Monopoly Firm. Note there are no numbers for MC and MR when Q=0.

To complete the table you need to know that the ATC of producing 4 units of output is $650 and that the Total Variable Cost of producing 6 units of output is $870.

b) State the Total Fixed Cost for this firm. Please explain how you got your answer.

c) At which unit of output does Diminishing Marginal Returns start? Please explain your answer.

d) If this firm produces in the Short Run, determine its profit maximizing/loss minimizing output level. Please explain your answer using MC and MR.

e) If this firm produces in the Short Run, determine its profit maximizing/loss minimizing price.

f) If this firm produces in the Short Run, state its profit maximizing/loss minimizing profit amount.

g) If this firm shuts down in the Short Run, determine its profit maximizing/loss minimizing profit amount. Please explain your answer.

h) What should this firm do in the Short Run in order to maximize its profits/minimize its loss (produce or shut down)? Please explain your answer using numbers.

i) Explain what this firm should do in the Long Run.

raspberryhorse277

The following table represents short run cost-revenue information (in dollars) for a firm in a competitive market.

Q	P	TR	MR	MC	TC	Total Profit
0			N/A	N/A	600
1					700
2				80
3				50
4					860
5				20
6					1000
7					1040
8				60
9
10

(a) Fill in all the blanks above using the following information: The Market Price is $100 per unit of output, the VC of producing 9 units of output is $570, and the ATC of producing 10 units of output is $270

(b) Where does diminishing returns start? Explain your answer.

(d) In the Short Run, if this firm would go into production, determine the profit maximizing (or loss minimizing) level of output and profit amount.

(e) In the Short Run, if this firm would instead shutdown without going into production, determine its production amount and profit amount.

(f) Please determine the best course of action for this firm in the Short Run.

(g) Based on the data above, in the Long Run, explain what this firm should do.

brownseal366

ECO 1304 Chapter Notes - Chapter 10: Monopolistic Competition, Economic Equilibrium, Profit Maximization

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