Question

A monopolistically competitive firm faces the following demand curve for its product: 6 Price ($) Quantity 10 2 9 4 8 6 7 8 5 12 4 14 3 16 2 18 1 20 10 Refer to the Table. The firm has total fixed costs of $20 and a constant marginal cost of $5 per unit. What will the firm do? a) It will produce 2 units; firms will exit the market in the long run. b) It will produce 4 units: firms will exit the market in the long run. *) It will produce 6 units; firms will exit the market in the long run. d) It will produce 8 units: firms will exit the market in the long run.

Answer 1

It will produce 8 units; firms will exit the market in long run.

(The fixed cost is $20 and constant marginal cost is $5. So, the total cost is $20+$5*8 = $20+$40 = $60. As there is constant marginal cost exist so the firm will produce the maximum and the revenue here is $7*8 =$56. The total loss is $60-$56=$4. In the long run the firms can't bare the loss and eventually exist the market)...

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