Suppose that you have the following numbers for a firm in a monopolistically competitive industry. Total...

Suppose that you have the following numbers for a firm in a monopolistically competitive industry.

Total Revenue=1200

Marginal Revenue=10

Total Cost=700

Total Variable Cost=500

Price=12

MC=6

Explain how you know that:

a. this firm is not maximizing profit.

b. this firm is operating in the short-run.

c. there is excess capacity or “waste” associated with this firm (Hint: Given the information above, what is ATC? Is the firm operating at the minimum of the ATC curve?)

Expert Solution

(a) The profit maximization condition is that Marginal revenue=MC. But here marginal revenue is not equal to marginal cost.

(b) Yes the firm is operating in the short run because it is incurring fixed cost which is equal to 200.

(c) Output=Total revenue/Price=1200/12=100

ATC=total cost/output=700/100=7

No, the firm is not opearting at the minimum of ATC because the minimum ATC is at output at which MC=ATC, but here MC is less than ATC which means ATC is falling and hence the firm is operating with unutilised excess capacity.

Rahul Sunny answered 2 years ago

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