Microeconomics
Microeconomics
11th Edition
ISBN: 9781260507140
Author: David C. Colander
Publisher: McGraw Hill Education
Question
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Chapter 14, Problem 21QE

a)

To determine

The quantity of output chosen by the firm.

b)

To determine

The average fixed cost of the monopolistic competitor.

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The diagram above represents a monopolistically competitive firm. Answer the questions below.  Is this firm operating in the short-run or long-run? How do you know?  Calculate this firm’s accounting profit.  From the diagram, what is the productively efficient output for this firm?  From the diagram, economies of scale are maximized at which output level? Explain.  From the diagram, what is the allocatively efficient output for this firm? Explain.
Suppose you manage a local grocery store, and you learn that a very popular national grocery chain is about to open a store just a few miles away. Use the model of monopolistic competition to analyze the impact of this new store on the quantity of output your store should produce (Q) and the price your store should charge (P). What will happen to your profits? Explain your reasoning in detail. How and why do profits change? What could you do to defend your market share against the new store?
You are the manager of a monopolistically competitive firm. The present demand curve you face is P = 100 – 4Q. Your cost function is C(Q) = 50 + 8.5Q2. What level of output should you choose to maximize profits? What price should you charge? What will happen in your market in the long run? Explain.
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