Question

The table below shows data for Flo's Beach Ball Company, a monopolistically competitive firm.

Price	Quantity	Total Cost	TR ($)	MR  ($)	MC ($)
$10	6	$50		--	--
$9	7	$53
$8	8	$57
$7	9	$62
$6	10	$68

a. Use the columns above to calculate Total Revenue, Marginal Revenue, and Marginal Cost at each output level. Use negative signs where appropriate.

b. In order to maximize profit, how many beach balls should Flo’s Company produce?  

What price should the firm charge? $  

c. At the profit-maximizing output level, what is the firm’s total profit? $  

d. Given your answer from (b), what will happen to the beach ball industry in the long-run? [Describe the steps that will occur.] What will happen to the profits for Flo’s Company?

Answer 1

a)

b) The profit maximizing condition is: MR = MC. From the table it is seen that MR = MC = $3, when 7 units of output is produced and $9 per unit is charged. Thus, 7 beach balls Flo’s Company should produce and the firm should charge a price of $9 per unit.

c) The firm’s total profit =TR - TC = $63 - $53 = $10

d) The firms in the industry is earning positive economic profit in the short run.

In the long run, new firms will be attracted by this profit and start entering the market. When new firms enter the market, the aggregate supply of the good increases. So, the equilibrium price decreases leading to a decrease in the profit of each firm. This process of entry of new firms and a decrease in the price of the product will continue until each firm earns zero economic profit.