Question

3) Monopolistic Competition Long-Run (7 points) The marginal costs (MC), average variable costs (AVC), and average total costs (ATC) for a monopolistically competitive firm are shown in the figure below. Price/Cost (S) a. What is the firm's profit-maximizing output level? b. What is its profit-maximizing price? c. What is the firm's economic profit? d. What would the output level be that is productively efficient (minimizes ATC)? e. At what price and output level would this outcome be allocatively efficient? (Hint recall that allocative efficiency occurs where Qs Qd] f. Based on your answers to (d) and (e), is the long-run outcome in a monopolistically competitive market efficient? Why or why not? 50 MC 40- АTC 30- AVC 20- D 10- MR 0 0 10 20 30 40 50 Quantity

Answer 1

a) Profit is maximum when MR = MC. Here it is maximized at Q = 20 units

b) It is found at the demand curve. It is $22 per unit

c) It is $0 because ATC = P = $22 and so Profit = P – ATC = 0

d) When MC = ATC, firm achieves productive efficiency. This occurs at Q = 27 units

e) P = MC occurs at Q = 26 units. The relevant price level is $20 per unit

f) No. This is because in the long run the level of output is 20 units and so neither there is a productive efficiency (at Q = 27) nor there is allocative efficiency (at Q = 26)