Answered: 25 ATC 25 ÁTC 20 15 DD 10 5 MR 10 20 30…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

i) Use the graph below to explain the output, profit and loss conditions for monopolistically competitive firms. Show your work where appropriate in reference to the Graph. ii)With examples, examine the barriers to business entry for imperfect competition firms.

25
ATC
25
ÁTC
20
15
DD
10
5
MR
10
20
30
40 50
60
70
80
90

Expert Solution

Step 1

A monopolistic competitive firm will be in equilibrium when its profit is maximized or loss is minimized. For this following condition must be satisfied:

MR = MC
Slope of MC > Slope of MR

Step 2

Firm 1:

As shown in above diagram the profit maximizing output and price is determined by the intersection of marginal revenue and marginal cost curve. At the point of intersection the profit maximizing price is 20 and output is 40

As shown in diagram Average Total Cost associated with the profit maximizing output and price is 17.5

We have

Price (P) = 20

Quantity (Q) = 40

Average Total Cost (ATC) = 17.5

We know that

Profit = Q * [P - ATC]

Profit = 40 * [20 - 17.5]

Profit = 100

The Firm 1 is earning profit.

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