Question

1. A monopolistic competitor has the following information about cost and demand.
   1. In the short run, what price will the monopolistically competitive firm charge?  What quantity of output will they produce? And what profit would they obtain.  Explain what you would expect to happen in the long run and why.
   2. Had this been data for a typical firm in a perfectly competitive market, what level of output and price would result?

Quantity	Price ($)	Total Revenue ($)	Marginal Revenue ($)	Total Cost ($)	Marginal Cost ($)	Average Cost($)
0	25	0	25	30	—	—
2	24	48	23	35	2.5	17.5
4	23	92	21	45	5	11.25
6	22	132	19	60	7.5	10
8	21	168	17	77	8.5	9.63
10	20	200	15	100	11.5	10
12	19	228	13	126	13	10.5
14	18	252	11	165	19.5	11.79
16	17	272	9	210	22.5	13.13
18	16	288	7	260	25	14.44
20	15	300	5	320	30	16

Answer 1

a. The equilibrium condition of the monopolistic competitor is MC=MR. In the table given MC equals MR(Mc=(MC=$13, MR=$13) with the volume of output 12 and price $19. The optimum quantity of output is 12 and the optimum price is $19.

The profit of the firm is Total revenue− Total cost. At the equilibrium output the Total Revenue = $228 and Total cost = $126. Then the monopolistic competitor earns a total profit of $102. Per unit profit = Total profit/ units of sales which is equal to $102/12=$8.5.

In shortrun the supply is limited due to the barriers to the entry of new firms. Thus the monopolistic competitor is able to earn this extra normal profit in shortrun. But longrun new firms will enter into the industry and this will cause increased supply of output and price fall. This fall in price gives normal profit to all the firms in the industry in longrun.

b. The equilibrium condition of the perfect competitive market is also same as monopolistic competition ie MC=MR.