Question

# Understanding excess capacity The following table shows the daily cost data and demand schedule for a...

Understanding excess capacity

The following table shows the daily cost data and demand schedule for a typical firm producing board games in a monopolistically competitive market in the short run.

Fill in the values in the Marginal Cost, Total Revenue, and Marginal Revenue columns in the following table and then answer the questions that follow.

Quantity

Price

Total Cost

Marginal Cost

Total Revenue

Marginal Revenue

Average Total Cost

(Board games)

(Dollars per game)

(Dollars)

(Dollars)

(Dollars)

(Dollars)

(Dollars)

1 12.00 13
2 10.00 28
3 9.00 30
4 8.00 36
5 6.00 40
6 4.00 60
7 2.00 72
8 1.00 96

Under monopolistic competition, a typical firm will produce

board games at a price of

per board game in the short run.

Based on your calculations, the firm will   .

Fill in the Average Total Cost column in the previous table.

Based on your calculations, the level of excess capacity in this monopolistically competitive market is   .

Solution:-

 Quantity Price Total Cost Marginal Cost Total Revenue Marginal Revenue Average Total Cost 1 12 13 --- 12 --- 13 2 10 28 15 20 8 14 3 9 30 12 27 7 10 4 8 36 6 32 5 9 5 6 40 4 30 -2 8 6 4 60 20 24 -6 10 7 2 72 12 14 -10 10.28 8 1 96 24 8 -6 12
• Marginal Cost = (TC) n-(TC) n – 1
• Total Revenue = Price*Quantity
• Marginal Revenue = (TR)n -(TR)n-1
• Average total Cost = Total Cost/Quantity
• Profit = TR - TC

(1). [When Q = 3, MR > MC but when Q = 4, MR < MC, so profit is maximized when Q = 3]

A firm will produce 3 games at \$9 each.

(3) Firm will suffer a loss of \$3.

(4) Excess capacity is 2 games.

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