Question

Assume that the short-run cost and demand data given in the table below confront a monopolistically competitive firm selling a given product and engaged in a given amount of product promotion. Compute the marginal cost and marginal revenue of each unit of output and enter these figures in the table.

Total Marginal Quantity Marginal
Output cost cost demanded Price revenue
0 $ 75 0 $180
1 120 $_____ 1 165 $_____
2 135 _____ 2 150 _____
3 165 _____ 3 135 _____
4 210 _____ 4 120 _____
5 270 _____ 5 105 _____
6 345 _____ 6 90 _____
7 435 _____ 7 75 _____
8 540 _____ 8 60 _____
9 660 _____ 9 45 _____
10 795 _____ 10 30 _____

(a) At what output level will the firm produce in the short run?
(b) What will be the price?
(c) What will be the total profit?
(d) What will happen to demand, price, and profit in the long run? Be specific and show using a graph.

Answer 1

Output	Total Cost	Marginal Cost	Quantity Demanded	Price	Total Revenue	Marginal Revenue
0	75		0	180	0
1	120	45	1	165	165	165
2	135	15	2	150	300	135
3	165	30	3	135	405	105
4	210	45	4	120	480	75
5	270	60	5	105	525	45
6	345	75	6	90	540	15
7	435	90	7	75	525	-15
8	540	105	8	60	480	-45
9	660	120	9	45	405	-75
10	795	135	10	30	300	-105
a) The firm will produce till marginal reveue is greater than the marginal cost. Thus the firm will
produce 4 nits of output.
b) Price corresponding to equilibrium output will be $120
c) Profit = Total Revenue - Total Cost
Profit = 480 - 210 = $270
d) In the long run due to positive profit there will be increased entry in the industry. This will lead to
reduction in the prices thus higher demand and zero profit.