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February 23rd, 2012, 09:18 AM   #1
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please help me: monopolistically competitive market

Can some one kindly help me verify the answers for the below questions.

This figure depicts a situation in a monopolistically competitive market. (the graph is attached)
[attachment=0:c0znq8ss]Q5.png[/attachment:c0znq8ss]

i. What price will the monopolistically competitive firm charge in this market?
ii. What are the profit-maximizing price, quantity, and resulting profit?
iii. How much consumer surplus will be derived from the purchase of this product at the monopolistically competitive price?
iv. How much profit will the monopolistically competitive firm earn in this situation?
v. How much output will the monopolistically competitive firm produce in this situation?

My answers are
i: 75
ii: price80, qty 20, profit (80 x 20) (70 x 20) = 200
iii: (80 75) = 5
iv: (75 x 25) (75 x 25) = 0
v: 25 units

Thank you
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File Type: png Q5.png (18.0 KB, 882 views)
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March 12th, 2012, 10:51 AM   #2
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Re: please help me: monopolistically competitive market

i. Is wrong because based on the demand curve the firm can charge more then that if only 20 units of the good are produced. We expect 20 unites to produce because that is where marginal cost equals marginal revenue.

ii. Looks good.

iii. I think for this one you should be looking for the intersection of the demand curve with the ATC curve. Regardless your Marginal cost curve looks like it is drawn wrong on the graph as the average total cost should be the integral of the marginal cost divided by the quantity produced.

iv and v are both wrong.
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