If the firms in a monopolistically competitive market are earning economic profits or losses in the short run, would you expect them to continue doing so in the long run? Explain your answerIs a monopolistically competitive firm productively efficient? How can you tell?Offer one reason why a monopolistically competitive firm might be productively inefficient.Is it allocatively efficient? How can you tell?Offer one reason why a monopolistically competitive firm might be allocatively inefficient.What stops oligopolists from acting together as a monopolist and earning the highest possible level of profits? Offer two obstacles to oligopolists cooperating. Aside from advertising, how can monopolistically competitive firms increase demand for their products? What effect would doing this have on the elasticity of the firm’s perceived demand curve? Explain your answers.Would you expect the kinked demand curve to be more extreme (like a right angle) or less extreme (like a normal demand curve) if each firm in the cartel produces a near-identical product like OPEC and petroleum? What if each firm produces a somewhat different product? Explain your reasoning.Andrea’s Day Spa began to offer a relaxing aromatherapy treatment. The firm asks you how much to charge to maximize profits. The first two columns in the table below provide the price and quantity for the demand curve for treatments. The fifth column shows its total costs.What is the profit-maximizing level of output for the treatments and how much will the firm earn in profits?PriceQuantityTotal RevenueMarginal RevenueTotal CostMarginal Cost$250$0N/A$130N/A$2410 $275 $2320 $435 $22.5030 $610 $2240 $800 $21.6050 $1005 $21.2060 $1225 Mary and Raj are the only two growers who provide organically grown corn to a local grocery store. They know that if they cooperated and produced less corn, they could raise the price of the corn. If they work independently, they will each earn $100. If they decide to work together and both lower their output, they can each earn $150. If one person lowers output and the other does not, the person who lowers output will earn $0 and the other person will capture the entire market and will earn $200. The table below represents the choices available to Mary and Raj. Use it to answer the questions below. MaryWork IndependentlyCooperate and Lower OutputRajWork IndependentlyRaj: $100Mary: $100Raj: $200Mary: $0Cooperate and Lower OutputRaj: $0Mary: $200Raj: $150Mary: $150 What is the most profitable choice for Raj if he is sure that Mary will cooperate?If Mary thinks Raj will cheat, what should Mary do and why?What is the prisoner’s dilemma result?What is the preferred choice if they could ensure cooperation?

“Since you have asked multiple questions, we will solve the first question for you. If you want any specific question to be solved, then please specify the question number or post only that question.” The monopolistic competitive market structure has properties of both monopoly and perfect competition. Like monopoly, the demand curve faced by individual firms are negatively sloped. The firms produce closely substitutable goods in this market. In order to gain a competitive edge in the market, every firm differentiates their close substitute products. Moreover, advertising campaigns are used by firms to introduce their respective brands of product and their subsequent differentiation. However, like perfect competition there are large number of buyers and sellers in the market. In addition, like perfect competition, there is no barrier for entry and exit of new firms in the market.Q1 Under monopolistic competition, a firm generally earns a supernormal or positive economic profit in the short run, while earing a normal or zero economic profit in the long run. Hence, a firm earning a positive economic profit in the short run will continue to operate in the long run. In the long run, this firm would only earn a zero economic profit as P=ATC. However, if a firm earns zero economic profit in the short run, then that firm will most likely not to continue in the long run. This is because with free entry and exit of new firms in the market, the demand curve of the firm will further shift down, which would result in a loss in the long run. Finally, if a firm is facing loss in the short run, then it would not continue in the long run as it would loss more. Part 1 A monopolistically competitive firm is productively inefficient as it keeps some excess reserves in production plant. This can be illustrated by the following set of diagrams. In panel (a), the short run equilibrium is shown by the firm. The firm equates MR with MC, and charges a price P1 for Q1 quantity at equilibrium. It can be seen that the firm is earning a positive economic profit (yellow rectangle) in the short run as P1 is greater than ATC. In panel (b), the long run equilibrium is shown. Due to free entry and exit of new firms in the market, the demand curve of the firms shifts down because of increased competition and becomes tangent to ATC curve. Therefore E is the long run equilibrium point. At this point, it can be seen that the demand curve is tangent to ATC in its decreasing part before the minimum point. This implies that the firm is not fully utilizing its plant and is keeping so excess reserves. Thus, a firm in monopolistically competitive market is productively inefficient. Part 2 A monopolistically firm is productively inefficient as it sub optimally uses the production plant, thereby keeping an excess reserve in the production. Part 3 The production of a monopolistically competitive market is not allocatively efficient as creates a dead weight loss (DWL) (bold black triangle) in the production process. Part 4 The monopolistically is allocatively inefficient as it utilizes its production plant sub optimally and creates excess capacity. Since output is less than competitive level, it creates an inefficient allocation by resulting in DWL.Therefore, a monopolistically competitive firm is allocatively inefficient.

Answered: If the firms in a monopolistically…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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If the firms in a monopolistically competitive market are earning economic profits or losses in the short run, would you expect them to continue doing so in the long run? Explain your answer
1. Is a monopolistically competitive firm productively efficient? How can you tell?
2. Offer one reason why a monopolistically competitive firm might be productively inefficient.
3. Is it allocatively efficient? How can you tell?
4. Offer one reason why a monopolistically competitive firm might be allocatively inefficient.

What stops oligopolists from acting together as a monopolist and earning the highest possible level of profits? Offer two obstacles to oligopolists cooperating.

Aside from advertising, how can monopolistically competitive firms increase demand for their products? What effect would doing this have on the elasticity of the firm’s perceived demand curve? Explain your answers.
Would you expect the kinked demand curve to be more extreme (like a right angle) or less extreme (like a normal demand curve) if each firm in the cartel produces a near-identical product like OPEC and petroleum? What if each firm produces a somewhat different product? Explain your reasoning.
Andrea’s Day Spa began to offer a relaxing aromatherapy treatment. The firm asks you how much to charge to maximize profits. The first two columns in the table below provide the price and quantity for the demand curve for treatments. The fifth column shows its total costs.What is the profit-maximizing level of output for the treatments and how much will the firm earn in profits?

Price	Quantity	Total Revenue	Marginal Revenue	Total Cost	Marginal Cost
$25	0	$0	N/A	$130	N/A
$24	10			$275
$23	20			$435
$22.50	30			$610
$22	40			$800
$21.60	50			$1005
$21.20	60			$1225

Mary and Raj are the only two growers who provide organically grown corn to a local grocery store. They know that if they cooperated and produced less corn, they could raise the price of the corn. If they work independently, they will each earn $100. If they decide to work together and both lower their output, they can each earn $150. If one person lowers output and the other does not, the person who lowers output will earn $0 and the other person will capture the entire market and will earn $200. The table below represents the choices available to Mary and Raj. Use it to answer the questions below.

	Mary
Work Independently	Cooperate and Lower Output
Raj	Work Independently	Raj: $100 Mary: $100	Raj: $200 Mary: $0
Cooperate and Lower Output	Raj: $0 Mary: $200	Raj: $150 Mary: $150

What is the most profitable choice for Raj if he is sure that Mary will cooperate?
If Mary thinks Raj will cheat, what should Mary do and why?
What is the prisoner’s dilemma result?
What is the preferred choice if they could ensure cooperation?

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