Question

Given the following information for a monopolistic competitor:

Demand: P = 78 – 5(Q)

Marginal revenue: MR = 78 – 10(Q)

Marginal cost: MC = 2(Q) + 10

Average total cost at equilibrium is 14

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) _____

Answer 1

Answer : 1) For monopolistic competition at profit maximizing output level MR = MC occur. So,

78 – 10Q = 2Q + 10

=> 78 - 10 = 2Q + 10Q

=> 68 = 12Q

=> Q = 68 / 12

=> Q = 5.67

Therefore, here the profit-maximizing output level is, Q = 5.67 .

2) From demand function we get,

P = 78 - (5 * 5.67)

=> P = 49.65

Therefore, here the profit maximizing price is, P = $49.65 .

3) Total revenue = P * Q = 49.65 * 5.67

=> Total revenue = $281.52

Therefore, here the total revenue is $281.52 .

4) At profit maximizing output level ATC (Average Total Cost) is 14.

Total cost (TC) = ATC * Q = 14 * 5.67

=> TC = $79.38

Therefore, here the total cost is $79.38 .

5) Profit = Total revenue - Total cost = 281.52 - 79.38 = $202.14

Therefore, here the profit is $202.14 .

6) The answer is "No".

Because in long-run for monopolistic competition Price = Average Total Cost occur. But here the price is $49.65 which is higher than the average total cost of $14. So, here the firm is not in long-run situation.