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APE Micro Activity 3 16 Answers

Microeconomics

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6K views5 pages

APE Micro Activity 3 16 Answers

Microeconomics

Uploaded by

Mosh
Copyright
© © All Rights Reserved
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Monopolistic Competition _Monopolistic comperition is an appropriate name for this important market structure. There is competition because there isa large number of firms producing similar but not identical products. Each firm has some monopoly power over price because its product is different from others with which itis competing. Each monopolistically competitive firm faces a downward sloping demand {D) curve soit has to reduce its price to have consumers buy more of its product. This means it has @ dovmnward sloping marginal revenue (MR) curve that lies below its D curve. In fact, the revenue graph of a monopolistically competitive firm looks like the revenue graph of a monopoly. ‘A monopolistically competitive firm is similar to a perfectly competitive firm because while it can earn a positive total profit in its short-run equilibrium, it wll break even in its long-run equilibrium. Itis different from a monopoly in this regard because a monopoly can maintain a positive total profit in the long run as Jong as it has barriers to entry that prevent other firms from coming into the market. Part A: Short-Run Equilibrium of a Monopolistically Competitive Firm A monopolistically competitive firm is in short-run equilibrium when it produces the output where ‘marginal revenue equals marginal cost (MR = MC). Its optimal price is found on its demand curve at this output level. Like other firms, the firm will shut down if at its best output level, its total revertue is Jess than its total variable cost, Figure 3-16.1 shows a monopolistically competitive firm in short-run equilibrium with an output of 600 units per period. Answer the questions that follow the graph. Figure 3-16.1 : A Monopolistically Competitive Firm in Short-Ruin Equilibrium, Kk $130) 5 arc 8 8 AVG a 5 2 a = a « AR 600 G20; QUANTITY _Atvaced acento Mitosconoe: Tesch Rune Maal © Coin for Reon Fagan, New Yok NY. 323 324 ‘What price will the firm charge for its profit-maximizing output? $85 ‘What are the dollar values and coordinates of these items at the output of 600 units? (A) Total revenue (885)(600) = $51,000, OBJN (B) Total cost ($65)(600) = $39,000, OBHW (©) otal profit ($20)(600) = $12,000, WHIN (D) Average profit ($85 ~$65) = $20, HT (E) Marginal profit ($30 - $30) = $0, no gap between MR and MC curves at 600 . What is the value of the firm's total fixed cost at 600 units? What is the value of its total fixed cost at O units? At Q= 600, TFC = (600)($65 - $36) = $17,400, This isthe value of TFC at all output levels including Q=0. . Should this firm shut down? Why? No, It is earning a positive total profit. It would only shut down if it were making a loss and TR ‘were less than TVC, . On the horizontal axis, indicate by Q, the output level society would like this firm to produce. ‘Why does the firm not want to produce Q,? Q, is the output level at which P = MC, or where the D curve intersects the MC curve, The monopolistically competitive firm does not want to produce Q, because those units between 600 ‘and Q, have MR

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