Bundle: ECON MICRO, 5th + Aplia, 1 term Printed Access Card
Bundle: ECON MICRO, 5th + Aplia, 1 term Printed Access Card
5th Edition
ISBN: 9781337192712
Author: William A. McEachern
Publisher: Cengage Learning
Question
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Chapter 10, Problem 1.1P
To determine

(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 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.

Expert Solution
Check Mark

Explanation of Solution

A monopolistically competitive firm is known to face the following demand and cost structure in the short run. The figures in blue were missing figures from the data given. The table has thus been completed.

OUTPUT PRICE ($) FC($) VC($) TC = FC + VC MC TR = PRICE x OUTPUT MR PROFIT/LOSS = TR - TC
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)
To determine

(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.

Expert Solution
Check Mark

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.

To determine

(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.

Expert Solution
Check Mark

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.

To determine

(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.

Expert Solution
Check Mark

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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