(a)
The missing values are to be computed and thereby the table is to be completed.
Concept Introduction:
The monopolistic firm - A form of imperfect competition where there are a very large number of buyers and sellers in the market. The products are nearly but not perfectly homogenous, i.e. there is product differentiation. The entry and exit of firms are free. Unlike the
Marginal Revenue (MR) - The revenue earned by a firm by selling one additional unit of the output is the marginal revenue of the firm.
Marginal Cost (MC) - The cost incurred by a firm in the production of one more unit of output is the marginal cost of the firm.
Explanation of Solution
A
| OUTPUT | FC($) | VC($) | TC = FC + VC | MC | TR = PRICE x OUTPUT | MR | ||
|---|---|---|---|---|---|---|---|---|
| 0 | 100 | 100 | 0 | 100 | - | 0 | - | 100 (L) |
| 1 | 90 | 100 | 50 | 150 | 50 | 90 | 90 | 60 (L) |
| 2 | 80 | 100 | 90 | 190 | 40 | 160 | 70 | 30 (L) |
| 3 | 70 | 100 | 150 | 250 | 60 | 210 | 50 | 40 (L) |
| 4 | 60 | 100 | 230 | 330 | 80 | 240 | 30 | 90 (L) |
| 5 | 50 | 100 | 330 | 430 | 100 | 250 | 10 | 180 (L) |
| 6 | 40 | 100 | 450 | 550 | 120 | 240 | -10 | 310 (L) |
| 7 | 30 | 100 | 590 | 690 | 140 | 210 | -30 | 480 (L) |
(b)
The highest profit or the lowest loss.
Concept Introduction
The monopolistic firm - A form of imperfect competition where there are a very large number of buyers and sellers in the market. The products are nearly but not perfectly homogenous, i.e. there is product differentiation. The entry and exit of firms are free. Unlike the perfect competition, the firms have selling costs and imperfect knowledge marks the structure of the market. The market is a deviation from the ideal but not as competitive as the oligopoly or duopoly market.
Marginal Revenue (MR) - The revenue earned by a firm by selling one additional unit of the output is the marginal revenue of the firm.
Marginal Cost (MC) - The cost incurred by a firm in the production of one more unit of output is the marginal cost of the firm.
Explanation of Solution
The firm faces losses across all units of output in the short run. However, the losses are minimized at $30 when it produces 2 units of output. This has been underlined in the table above.
(c)
Whether the firm should operate or shut down in the short run.
Concept Introduction
The monopolistic firm - A form of imperfect competition where there are a very large number of buyers and sellers in the market. The products are nearly but not perfectly homogenous, i.e. there is product differentiation. The entry and exit of firms are free. Unlike the perfect competition, the firms have selling costs and imperfect knowledge marks the structure of the market. The market is a deviation from the ideal but not as competitive as the oligopoly or duopoly market.
Marginal Revenue (MR) - The revenue earned by a firm by selling one additional unit of the output is the marginal revenue of the firm.
Marginal Cost (MC) - The cost incurred by a firm in the production of one more unit of output is the marginal cost of the firm.
Explanation of Solution
The firm should continue production as long as its price is above the variable cost. This helps the firm make up for its VC completely and a part of its fixed cost. The Average revenue or the price is persistently below the VC after the first unit of production. It implies that in the process of production, the firm is unable to cover its FC and in fact adds on to the liability of VC if it produces more than one unit. Thus, the firm should produce only 1 unit of output.
(d)
With an increase in the output, the relationship between the marginal revenue and the marginal cost is to be determined.
Concept Introduction:
The monopolistic firm - A form of imperfect competition where there are a very large number of buyers and sellers in the market. The products are nearly but not perfectly homogenous, i.e. there is product differentiation. The entry and exit of firms are free. Unlike the perfect competition, the firms have selling costs and imperfect knowledge marks the structure of the market. The market is a deviation from the ideal but not as competitive as the oligopoly or duopoly market.
Marginal Revenue (MR) - The revenue earned by a firm by selling one additional unit of the output is the marginal revenue of the firm.
Marginal Cost (MC) - The cost incurred by a firm in the production of one more unit of output is the marginal cost of the firm.
Explanation of Solution
As the firm increases its production, the MR continuously falls while the MC persistently rises. The firm has no level of output where it can optimize production. The firm’s equilibrium at MR=MC does not exist for the production quadrant. The negative production is hypothetical. Thus, the firm makes only losses.
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