Question

Please only answer a.b.c.d. thanks! Other questions are just to keep this question complete.

State the profit maximizing condition of a firm in a perfectly competitive industry. Show the industry output and price in the long run.

What are the profits of a firm in a perfectly competitive industry?

A firm operates on increasing returns to scale (monopolistically competitive firm). Assuming constant marginal costs explain the shape of the Average Cost Curve (AC)?

Draw the AC, MC and Demand curves facing the monopolistically competitive firm.  

a. State the profit maximizing condition and show the profit maximizing output and price in the short run.

b. Assuming that the firm makes profits in the short run, show its profits in a diagram.

c. If there are 5 such firms in the short run, explain what happens to the number of firms in the long run?

d. Show the long run equilibrium of a firm in a diagram.

Answer 1

Questions (a), (b), (c) and (d) relate to monopolistically competitive firm.

(a) A monopolistic competitor will maximize profit by equating Marginal revenue (MR) with its MC. In following graph, profit is maximized at point A where MR equals MC, with price being P0 and output being Q0.

(b) Profit equals area P0CDE.

(c) Since firms are making short run economic profit, it will attract entry, which will increase the number of firms in long run.

(d) In long run, Price equals Average total cost (ATC) for the firm which earns zero economic profit. In following graph, long run equilibrium is at point B.