Question

You are the manager of a monopolistically competitive firm, and your demand and cost functions are given by Q = 100 - 1/3P and TC = 1,500 + 2Q2 a. Calculate the profit-maximizing output. Solve using 2 methods. (6pts) b. Calculate P, AC, AVC, AFC at that output level. ©(6pts) c. Explain how your answers in part (b) would let you decide which case it is (explain in detail). Draw the case. ©(8pts)

Answer 1

In part (b) first of all the price level is not equal to Average Cost. So, the firm is not perfectly competitive. At price = 210, the firm earns positive profit of $3000.

So, the case is of a monopolistically competitive firm whose equilibrium lies to the left of minimum point of AC. There is excess capacity in the firm due to under utilization of resources.