Question

1. A.)What price will be charged by this firm (in the short-run) B.)What quantity will be sold by this firm in the short-run? C.) What profit will be earned by this firm (in the short-run) at that price and output?
2. Given #1 above, what happens in the long-run? Will the final price be higher or lower than what you found above? Assume that the costs remain the same and remember that this is a monopolistically competitive industry.
3. Given #2 above, what would happen if costs increase? In other words, if we’re at long-run equilibrium, and the minimum wage rises to $20/hr, what will happen to the price in the long-run? (increase/decrease/uncertain)

4. Q	Price	Total Cost	Marginal Cost	Total Revenue	Marginal Revenue	Avg Total Cost
   0	12	0	---------------------		-----------------
   1	11	5
   2	10	8
   3	9	11
   4	8	16
   5	7	25
   6	6	36
   7	5	49
   8	4	64
   9	3	81
   10	2	100

Answer 1

Q	Price	Total Cost	Marginal Cost	Total Revenue	Marginal Revenue	Avg Total Cost
0	12	0	---------	-------	------	-----
1	11	5	5	11	11	5
2	10	8	3	20	9	4
3	9	11	3	27	7	3.67
4	8	16	5	32	5	4
5	7	25	9	35	3	5
6	6	36	11	36	1	6
7	5	49	13	35	-1	7
8	4	64	15	32	-3	8
9	3	81	17	27	-5	9
10	2	100	19	20	-7	10

Marginal cost = ∆TC/∆Q

Total Revenue = P×TQ

Marginal Revenue = ∆TR/∆Q

Average Total Cost = TC/TQ

A. The equilibrium condition of the firm is MC=MR. At the volume output 4 the MC=MR (5). The price charged by the firm is 8.

B. In shortrun the equilibrium quantity is 4.

C. Profit is the Total Revenue – Total Cost. When the firm produces an output of 4 units and charges a price of 8, the total revenue is 4×8=32. The total cost is 16. The total profit = 32-16= 16.

1. In longrun in a monopolistically competitive market, the new firms will enter into the market. Hence the market price decreases with increased supply. The market price falls from below 8 in longrun. But the extent to which the market price falls depends upon the change in quantity supply over quantity demanded.

2. In longrun all firms in the industry earn zero economic profit (P= AC). If the cost of production increases, the increased cost result a fall in profit. Then some of the firm will quit the industry. Then the market supply falls and price increase.