Question

1. You are a business manager at a monopolistically competitive firm. One of your newly hired workers wants to know the following. (Please use the MR MC approach in your answer.)
   1. What are the steps required to determine the optimal level of output?
   2. What are the steps required to determine the price that corresponds to that optimal level of output?
   3. What are the steps required to determine if the firm has achieved maximum profits?
   4. What are the steps required to determine if the firm as achieved minimum losses?

please answer all parts of the question. Please be specific when answering parts c and d. Thank you!

Answer 1

a) Monopolistically competitive firm maximize its profit when MR = MC. In the above diagram, output level is Q*.

b) To get price level, point at intersection of MR and MC is extended vertically till it touch AR curve. Price in the above diagram is P*.

c) To determine if the firm have achieved maximum profit or not, firm must be operating at MR = MC. At this level, if ATC is less than the price charged by firm, there occurs a maximum profit. Total Profit is (Price - ATC) * Quantity sold.

Price mes 2.3 ATC 2 Quantity

d) To determine if the firm have achieved minimum loss or not, firm must be operating at MR = MC. At this level, if ATC is more than the price charged by firm, there occurs a minimum loss. Total Loss is (ATC - Price charged) * Quantity sold.