Name: Ammarah Sajid
Section: A2
Assignment # 6
Chapter #6: Monopolistic competition
1.
a. What price and output will this firm charge? What economic profit will this firm receive?
The price will be 4 and firm will generate 30 Q at this situation because there is profit maximizing quantit
marginal cost crosses the marginal revenue so, the economic will be 15 of the firm.
b. Are the short-run profits of this firm sustainable in the long-run? Clearly explain why lo
equilibrium may differ from the short-run equilibrium for a monopolistically competitive firm. I
which curves will be affected in the long-run.
In the short run profit of the firm donot sustainable in the long run because monopolistically competiti
follow a monopolist rule for maximizing profit.
c. Lastly compare the long-run equilibrium of a monopolistically competitive firm with that of a p
competitive firm. What differences do you see? [Draw a diagram to illustrate the situation of the fir
is in long run equilibrium]
In monopolistically competitive market if firm are making profit then new firm enter and the demand cu
the firms shift to the left. Similarly, if firm are making loses then exit from the market because of the
curve that shift into the right side. hence firm would not sustain in the long run because profit maximizing
2. The market structure of the local gas station industry is monopolistic competition. Suppo
currently each gas station incurs a loss. Draw a diagram for a typical gas station to show this sh
situation. Then, in a separate diagram, show what will happen to the typical gas station in the lon
Explain your reasoning.
Ans:
Each gas station will produce the output, and so charge the price, that maximizes its profitor minimizes
That is, it will produce quantity QU, where marginal cost equals marginal revenue, and so charge price PU
the price PU is lower than average total cost at the quantity QU, ATCU, each gas station incurs a loss. Tha
situation for the typical gas station looks like the accompanying diagram.
Price,
cost,
margina M AT
l C C
revenue
ATCU Loss
PU
DU
MR
Q U Quantit
y
U
Since gas stations are incurring losses, in the long run some will exit the industry. This shifts the demand a
marginal revenue curves for each of the remaining gas stations rightward. Exit continues until each remain
station makes zero profit. This is the long-run equilibrium. The situation for the typical gas station in this
equilibrium is illustrated in the accompanying diagram. Demand has increased to the level at which this ga
station makes zero profit at a price of PMC and a quantity of QMC.
Section: A2
Assignment # 6
Chapter #6: Monopolistic competition
1.
a. What price and output will this firm charge? What economic profit will this firm receive?
The price will be 4 and firm will generate 30 Q at this situation because there is profit maximizing quantit
marginal cost crosses the marginal revenue so, the economic will be 15 of the firm.
b. Are the short-run profits of this firm sustainable in the long-run? Clearly explain why lo
equilibrium may differ from the short-run equilibrium for a monopolistically competitive firm. I
which curves will be affected in the long-run.
In the short run profit of the firm donot sustainable in the long run because monopolistically competiti
follow a monopolist rule for maximizing profit.
c. Lastly compare the long-run equilibrium of a monopolistically competitive firm with that of a p
competitive firm. What differences do you see? [Draw a diagram to illustrate the situation of the fir
is in long run equilibrium]
In monopolistically competitive market if firm are making profit then new firm enter and the demand cu
the firms shift to the left. Similarly, if firm are making loses then exit from the market because of the
curve that shift into the right side. hence firm would not sustain in the long run because profit maximizing
2. The market structure of the local gas station industry is monopolistic competition. Suppo
currently each gas station incurs a loss. Draw a diagram for a typical gas station to show this sh
situation. Then, in a separate diagram, show what will happen to the typical gas station in the lon
Explain your reasoning.
Ans:
Each gas station will produce the output, and so charge the price, that maximizes its profitor minimizes
That is, it will produce quantity QU, where marginal cost equals marginal revenue, and so charge price PU
the price PU is lower than average total cost at the quantity QU, ATCU, each gas station incurs a loss. Tha
situation for the typical gas station looks like the accompanying diagram.
Price,
cost,
margina M AT
l C C
revenue
ATCU Loss
PU
DU
MR
Q U Quantit
y
U
Since gas stations are incurring losses, in the long run some will exit the industry. This shifts the demand a
marginal revenue curves for each of the remaining gas stations rightward. Exit continues until each remain
station makes zero profit. This is the long-run equilibrium. The situation for the typical gas station in this
equilibrium is illustrated in the accompanying diagram. Demand has increased to the level at which this ga
station makes zero profit at a price of PMC and a quantity of QMC.
