Question

4. Graphically illustrate a perfectly competitive firm and a non-perfectly competitive firm side by side. Explain the differences. 5. Illustrate graphically a monopolistic competitive firm at a above normal, normal and zero economic profit. (Three separate graphs)

Answer 1

4)here in the first diagram we consider a perfect competition and 2nd diagram we consider a non-perfect competitive market or a monopolistic competitive firm.in both the diagram the profit maximisng condition is same which is MR=MC.but in the 1st diagram price is pre determined it means firm can't influnce the price and at a given price he can sell whatever amount he wants.at equilibrium price P he can sell q amount.and his total cost is box POqE and his earning also the same box POqE.which means he is earning only normal profit in equilibrium.

But in the monopolistic competition price is P and quantity sell is q.his total cost is OqCB and his total revenue is OqAP.so his profit is the box PACB.so in equilibrium condition he can earn more than normal profit.and here price is not given.the seller can influence price.if he charges higher price qutity sell will fall.and if he want to sell more he has to decrease price.which means he can't control both the price and quantity sell at the same time.

5)here in the first figure the monopolistic firm earns above normal profit in the second diagram he earns normal profit and in the third diagram he earns no economic profit but he is not losing also.in the first figure price is P and quantity is q.here total revenue from selling q amount output is PAqO and cost is BCqO.so the profit is box PABC.in the second diagram both cost and revenue is box PAqO.so there is only normal profit.in both the first and second figure the firm is not producing his full extent.but in the third figure the firm is producing at full extent.so it is like perfect competition.where price is lower compare to figure 2.and quantity sold is also greater than figure 2.this situatiin may occur due to any government intervention.in this situation firm earns no economic profit.