Question

Given the following information for a monopolistic competitor: Demand: P = 68 – 7(Q) Marginal revenue:...

Given the following information for a monopolistic competitor:

Demand: P = 68 – 7(Q)

Marginal revenue: MR = 68 – 14(Q)

Marginal cost: MC = 2(Q) + 8

Average total cost at equilibrium is 22

1. At what output (Q) will this firm maximize profit?    

2. At what price (P) will this firm maximize profit?    

3. What is the total revenue (TR) earned at this output level?   

4. What is the total cost (TC) accrued at this output?    

5. What profit or loss is experienced by this firm?    

6. Could this firm be in a longrun situation? (answer 1 = yes, 2 = no)   

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Homework Answers

Answer #1

1. A monopolistic competitive firm maximizes its profit at the point where its MR = MC
So, 68 - 14Q = 2Q + 8
So, 2Q + 14Q = 68 - 8
So, 16Q = 60
So, Q = 60/16 = 3.75

2. P = 68 - 7Q = 68 - 7(3.75) = 68 - 26.25 = 41.75
So, P = 41.75

3. TR = P*Q = (41.75)*(3.75) = 156.5625

4. TC = Average total cost*Q = (22)*(3.75) = 82.5

5. Profit = TR - TC2 = 156.5625 - 82.5 = 74.0625

6. 2
(A monopolistic competitive firms zero economic profits in long run whereas this firm is earning positive economic profits so it can't be a long run situation.)

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